FTSE Bursa Malaysia 30 - Important Posting

Bursa and FTSE, or rather Financial Times, have been trying to make everyone use the FBM indices instead of the EMAS and KLCI. I guess FT would be able to earn fees for anyone using the new indices. One may argue on better computational and calculation ability by FT, or better market acceptance, or better marketability, etc... still somebody is forcing the thing down our throats.

Safe to say that despite Bursa and FT efforts, the media and investors by and large still preferred to quote KLCI and the EMAS, hard to retrain old dogs. In a move that almost is akin to raising the white flag, the 'twins' also put out the FBM KLCI index... hello, if there is nothing wrong with KLCI, why do we need to have FBM in front of the KLCI??? Its like putting MahSing MAS onto the planes should Mah Sing buys MAS - you can, but its stupid.
This posting will probably be worth hundreds of thousands if I were to speak at a conference or closed door seminar for professional investors. I should really open a bank account for donations to compensate myself.

Now they have tweaked the thing even tighter by putting up FBM 30, which is FTSE Bursa Malaysia Large 30 Index. Now the smart thing was to put all FBM 30 into FBM KLCI as well. One can argue that the CI is most widely followed by international investors, plus Malaysians and Singaporeans in particular. It is also the futures which the index is based on. Many older index funds use the KLCI as a benchmark for weighting their positions.

The biggest drawback of the KLCI is that many of the component members are illiquid and may have little in free float - that makes for difficult hedging, indexing and replication for ETF purposes. Like it or not, we will have two indices that we all will follow in the end, the KLCI will continue to be numero uno (don't believe me, try taking down the KLCI and hear the complaints) ... however smart investors would do well to pay heed to the FBM 30 index because those top 30 stocks will get better recognition and investors' interest. I see newer ETFs to relicate the FBM 30 rather than the KLCI type of indices. Its easier, cheaper, more accessible and plainly smarter.

That said, these 30 stock swould be accorded a premium to the rest of the smaller CI stocks. The premium is justified and will even grow when more country ETFs are introduced. Heck, I even think eventually there will be a FBM 30 futures index trading side by side the KLCI futures. The 30 stocks are better recognised, easier to replicate, better in transparency and liquidity ... heck even the Dow Jones index is only made up of just the 30 largest traded companies in the US.

As these stocks will be accorded higher premiums, it is good to take note of them. But not all dogs are created equal. Some will have a bigger premium because their fundamentals are better, or because they have better free float (the index rewards stocks with better liquidity).

Bumi Commerce
Sime Darby
Public Bank
Maybank
TNB
IOI
Genting
Axiata
MISC
Resorts
Telekom Malaysia
AMMB
DIGI
PPB Group
KLK
BAT
PLUS
Petronas Gas
YTL Corp
YTL Power
B Toto
UMW
Tanjong
MMC
Astro
Parkson Holdings
Petronas Dagangan
RHB Capital
MAS

For private investors who are the buy and hold types. These 30 may be a good starting to choose from as the premiums accorded to them is an added bonus.

Economists and strategists just have to make a note on the composition of the FBM 30 as to whetehr they are a good reflection on the real economy. Government leaders have to learn to interpret these indices before making broad strokes conclusions about the health of the overall economy and industries. The FBM 30 is tilted heavily to banks and financials, plantations, utilities and gaming. The FBM 30 is underrepresented in transportation, logistics, conglomerates and oil & gas.


p/s photos: Stefanie Sun Yan Zi

Sectors & Stocks I Like To Follow As CI Breaches 1,000

This is a follow up to the last posting on the confirmation of the bull run. As in any bull run, it is sometimes quite silly to look for stocks to recommend. The best performing stocks in a bull run are generally the worst type of stocks, no fundamentals, speculative and dodgy management. So, how to get the best returns? I cannot tell you the kind of speculative nonsensical stocks to look for, even though they can make good money, because its baseless and manipulative. Hence for the speculative stocks, you will have to ask your taxi driver or vegetable seller, they have better information on those type of stocks.

Can a simple announcement by Najib turn things so dramatically? We need to be be able to decipher what is blah-blah, and what constitute structural changes. Say that Malaysia is like a farm, the input and output are similar year in year out. Sometimes, through no fault of our own, the yield on the farmland drops sharply, maybe we had an unexpected prolonged dry spell, or the weather patterns shifted unfavourably. You may then do your normal monetary and fiscal stimulus, you can buy some fertiliser or even tweak the tractor's engine to make it stronger, but thats that.

The recent announcement of the removal of the 30% rule is a structural change, not a cosmetic change. To the farmland, that is like getting plenty of tractors to totally remove the topsoil and replace with a much better soil. Its like rethinking on removing some of the plants that yield poorly and have low margins, and replant with ones that give better margins.

We also need to be careful that we do not do too much all at once. There will be those who will clamour for the 30% rule to be taken off FIC as well. One step at a time. While Najib is at it, there is one area that has been neglected for far too long, and too wasteful and results in a huge mis-allocation of resources - properties reserved for bumiputras discounts. I agree that the allotment should stay, but a more sensible rule to be added in that if the properties allotted for such schemes remain unsold for 6 months after the launch, then it is open to be sold as per normal. The rule causes developers to incur unnecessary financing charges, eats into margins, and raises the business model costing. Not being able to sell them after a prolonged period (say more than 1 -2 years) ties up the funds and capital for the developer to manage his business.

Stocks that will run as a group will be the Iskandar project - SP Setia, UEM Land, even the ports and logistics stocks. The second group of stocks should be those in financial services, if Najib can do the 30%, you can expect a similarly effective liberalisation in the financial services. Prefer AMMB, EONCAP.

One sector I particularly like is property, surprise, surprise. Except for the high end condos, the rest of the property market held up very well. However, if you look at property stocks in general, they got whacked by Mike Tyson in a boxing match. Looking at the structural changes, hard assets will do well, i.e. good land banks. I have also said that the world will be in for a strong reflationary period over the next 2-3 years, which again favours hard assets. I like SP Setia, UEM Land, even Talam, Sunway City, even MK Land.


p/s photos: Satomi Ishihara

Confirmation Of A Mini Bull Run For Bursa Stocks

Well, this will be short and sweet. Readers will be familiar that I have said that this will be a 3 steps forward, 2 steps back kind of rally. Then somebody threw something into the barbecue pit yesterday when they announced the removal of the 30% ruling for foreign companies. If I had not been that clear before, it is a substantive impetus for the KLCI. Prior to that, I was looking for a stop-start rally that could bring the KLCI to a year's high of 1,100 - but the high may only be reached towards the end of the year. Now, with the additional impetus, it has elevated Malaysian stocks into a different valuation platform. I can assure you that over the next 3 days, there will be a huge truckload of highly favourable strategy reports on Malaysian economy and Malaysian stocks. Imagine being used to a hose that has people stepping on it all the time, the water trickles in in spurts. The fresh developments is a bit like replacing that with a metal pipe. The flow on effects will be enormous. I am comfortable that the CI will surge past 1,020 within days. I have also revised the high for the CI this year from 1,100 to 1,180. Expect a premium being accorded to Malaysian stocks, compared to other emerging markets in the coming weeks and months. Cheers!


p/s photos: Kelly Lin

Now This Really Pisses Me OFF

If you managed to catch the frontpage cover news on New Straits Times (Thursday 2/2/06), it was an article on the cost of living among 128 cities in the world. The article even had a sub-heading "This is one ranking to be happy about". The top 10 most expensive cities in the world were:
1) Oslo
2) Tokyo
3) Reykjavik
4) Osaka
5) Paris
6) Copenhagen
7) London
8) Zurich
9) Geneva
10) Helsinki

Kuala Lumpur came in at #95 while Singapore was the most expensive city in the region coming in at #24. While I agree that this is one ranking we do not want to be high up, it was the journalist comments which angered me no end. Apparently it cost a Norwegian US$57,230 to buy a family sedan, US$443 to register the vehicle, US$2,619 for insurance and US$1.98 for a litre of unleaded petrol. He went on to cite the wonderful example of Malaysia, where you can buy a 2,499cc car for US$41,409, pay US$65.24 to register the vehicle, US$585.11 for insurance and just US$0.42 for unleaded petrol.

This meant that the person in Oslo would have spent US$60,292 to get the car on the road while the KL-ite would have had to fork out US$42,059.35 to do the same. AND THAT IS SUPPOSED TO BE A GOOD THING??? That is just bad journalism, because a Norwegian earns an average of US$62,700 a year while a Malaysian's per capita income comes in at US$10,400. OK, the Norwegian pays 43% more than a Malaysian for their car, but their pay is 6 times a Malaysian's pay!!! A Norwegian can pay off their car with just one year's salary but it will take a Malaysian 4 years to do the same. Even if you add another 20% to the Norwegian price tag for a high cc car, they are still way better off.

I agree that most items under cost of living in Malaysia are low, but the one big ticket item (car) is ridiculous. If there was a ranking on how much it would cost to buy a similar car in various cities in the world, I betcha that KL would rank in the top 5 out of 128. Now why is that?? To protect our wonderful car industry?? A car is not a luxury item for those living in Malaysia, you need the car to get around. You may want to impose a luxury tax to get more cars off the road provided you already have in place a fantastic public transport system (but let's not get there now). Enough is enough, stop eating into a Malaysian's pay packet for something that is so uneconomically priced.

Yes, our petrol is cheap, but the petrol reserves belong to Malaysians (not the government but Malaysians), ... shouldn't we enjoy the benefits, I mean, some Middle East countries even give petroleum royalty checks to their citizens. So that is not a good argument.

Rebuttle To 'King Of Emerging Markets' On Liquidity

The KLCI traded sideways for the past few weeks. One after another, foreign research units have downgraded Malaysian equities in preference for other bourses (e.g. Merrill Lynch, UBS and CLSA). Mark Mobius is the closest thing "emerging markets" will get that resembles Donald Trump. The traveling emerging markets' hero could easily pass as a "baddie" in a James Bond movie. Yet, what he says is followed closely by the international media... cos ... there is no one who champions the emerging markets quite like Mobius. The savvy self-promoter does very well for himself and his company (Templeton Emerging Funds Inc) - the firm probably lets him have a high profile as that would bring in the business, no doubt.

The Edge did an interview with Mobius (Oct 17, 2005 issue) and he highlighted a few interesting factors to explain why foreign funds are shying away from Malaysian stocks.

MM: " lack of liquidity ... need to grow the market... need to privatise the pension funds.."

Dali: There is only so much Malaysian markets can grow. Do you know how small we are. Take any ONE of the Top 10 market cap stocks in the US, any ONE is bigger than the entire listed market cap of the 1,000 odd listed companies. We are small, our base is small. Any credible foreign fund would probably only look at the top 25 market capitalised stocks as they are sufficiently big enough and liquid enough to move in and out. You CANNOT just ask us to grow our markets. To even have 20-30 stocks that are big enough to satisfy international fund managers' requirements is a task in itself. So, don't just open your mouth and say we need to grow and need more stocks with liquidity WHEN you should know better than others that "big companies" are hard to come by or be nurtured on a base population of 24 million.

On privatising our pension funds, I think we need to protect more the retirement funds of Malaysians, rather than provide additional revenue for foreign fund managers (who may or may not improve on overall long term returns). I am sure Mobius would like us to privatise more of our pension funds...

Two Sides To LIQUIDITY
On the liquidity issue, well again that boils down to the size of a normal big company in Malaysia. It takes time to grow an international company. You do not expect the MISCs and Petronas or Maybanks to just give up more shares just to satisfy the foreign funds investing requirements??!! Having said that, Mobius do have a point here, Government linked corporations and other top 50 market cap firms need to consider allowing more shares in the hands of the public in order to provide sufficient liquidity. There is not much point in holding over 50% of shares to maintain control when 40% will do. In fact recent studies have indicated that large companies (especially government linked firms) have outperformed the market over an extended period AFTER they have reduced their shareholding (creating more free float in the markets). If big boys cannot get in and out easily, they won't be interested.

Liquidity is not so simple. Do we just want to boost liquidity so that more foreign funds can invest in certain stocks? If that's the case - pray tell, what is the rationale for doing that, what benefit can we gain from getting foreign funds to invest. Do they somehow result in higher valuations (possibly), but so too will the fall be greater (when they pull out)... We want foreign direct investments NOT share traders, FDIs will result in employment and long term committment to the local economy. There is no difference in having Templeton as a holder of Malaysian stocks than say EPF. Unless we are saying that there are INSUFFICIENT local funds buying/holding Malaysian shares - which I don't believe to be the case. EPF could easily lift the active investing level in local shares substantially without hurting the overall risk portfolio.

Sure, foreign fund managers will belittle and crticise the short comings of investing in the Malaysian markets. Some are constructive but some should be IGNORED especially when the main beneficiaries of their talk is foreign funds themselves. We need to appreciate things that are beneficial to Malaysia like FDIs, and capital/bond raising for Malaysian corporates and the government.