US and China updates Jan2010

Investors are being carried away by a surprise Government’s Policies measures planned. Although the intention of US and China governments are good as the words goes-by, share markets could not stand it that way.

What was being implemented in China?
· Issuing government bonds with higher yield, this is to reduce the liquidity in the market, by encouraging money flowing back to the government’s war chest.
· Increasing the minimum down-payment for property purchases from 20% to 40%.
· Increased bank reserve requirement by 0.5% to 16% for big banks, and 14% for smaller banks.

What was being planned in US?
Obama’s bank plan composing two main elements:
1. Limitation of bank’s size.
2. Limitation of products and services offered, which is deem lucrative for banks.

As such, US and China market have corrected by 5.1% and 4.4% respectively. The percentage was no big deal, given the bull-run since March 2009. However, investors just can’t take it anymore, and this kind of policy changes gave them a very good excuse to take-profit now. Also, China was going to celebrate their long festive holiday next month, with many investors expected to stay side-lined instead.

Many analysts saying that investors are waiting for more clarifications in terms of China’s policy, inflation and interest rate movements. With Q4 GDP growth of 10%, China was expected to hike interest rate by 50 basis points by 2H10. Remember, this kind of measures is normal and it only happens when the situation was permitted.
Ask yourself, "I want an over-heating, or under-recovery economy?"

Meanwhile, Obama popular moves signaled a more restricted banking industry, which had gone through its worst years after some best years. These best years witnessed some good earnings, resulting from some innovating – complicated and hard to understand – products. However, those worst years was fuelled by excessive borrowings without proper risk management policies in place.

Now, Obama is doing some rectification works, but, seems that he didn’t get the backing of investment communities, whom still enjoying the spectacular bull-run. I think the market was oversold, given the not-yet-approved Obama’s plan, and minimal impacts on the earnings growth of US banks.

Unlocking the Mystery of Capital Protected Funds

Recently, there are a few capital protected funds being matured. However, most of the investors are not satisfy with the performances as promised when the fund was launched years ago. Is this the fault of investors who don’t understand it? Or, the fault of the product itself?

To make things worse, most of the investors are conservative in nature – older age group. If your mum or dad was one of them, make sure you finish this and explain to them.

Although Capital Protected Funds have been exist in Malaysia since early 20s, many investors still unclear about the structure of this type of fund. Is it safe as the name goes by? What is the return like? And, are there any terms and condition apply to it? Questions usually asked were answered below:

What are capital-protected unit trust funds?
· They are investments that promised to repay 100% of your capital, when held until maturity, which means your downside risk is protected.
· They do not guarantee returns to investors, but only promise to protect the capital invested.

So, what is the return likes?
· They allow investors to participate in the potential upside from the investments, by investing in risky assets like stocks, options or derivatives. Example, equities, bonds, commodities, indices and currencies.
· Normally, capital-protected funds are targeting 7%-10% annual return.
· Of course, they could give you zero return too. It all depends on the performance of underlying investment.

How is my capital being protected?
· It is protected by placing a large portion of capital in Zero Coupon Negotiable Instruments of Deposits (ZNIDs), which are money market instruments. ZNIDs carry a fixed interest rate, and aim to get back your 100% capital at maturity. (See Figure)
· These ZNIDs are issued and protected by Malaysian banks, with high-grade ratings.
· To make it even safer, fund manager would diversify the risks by sourcing ZNIDs issued by more than one bank.

Can I redeem before maturity? Any penalty?
· Yes, you can. But, you may not receive 100% of your initial capital. The value is based on the net asset value (NAV) at the time you redeem.
· Usually, a penalty fee of 0.5%-2% is imposed if you redeem before maturity.

Are you understood now? Be mindful if you come across capital-protected funds next time. Happy Investing.

2010 Economic Forecast

After some spectacular performances displayed by global equity markets, how is 2010 heading? In fact, 2009 is a year, in which, share market around the world performed the best in recent years. Indonesia is leading all the way with an awesome 87% gains, follow by China, India, Brazil, Hong Kong, Singapore, and Taiwan…

Meanwhile, Malaysia too joining the bandwagon by rising 45%, which was the index’s biggest annual gain since 1993. All of this was started since March 2009 when risks appetite increased and low interest rate environment surfaced.

Is this Sustainable?
However, all of this was fueled by excessive liquidity, couple with low interest rate, with oversold position of global markets only. The next engine would be earnings growth from companies, where this is the real food for the “Bull”. Because low interest environment forced people to invest, and a lot of people borrow USD to invest globally, which gave them handsome profit.

So, what’s the prediction of 2010?
As long as US do not hike interest rate, the current rally would persist going forward. If not, higher US interest rate will encourage people to divest all their investments globally in order to pay back the USD loans (See diagram). Anyway, US would only hike interest rate if their economy was on a stronger footing, where unemployment rate drop, retails sales up, and manufacturing sector recovering. All of this may happened in 2nd half of 2010. So, you still could enjoy your investments for few months more.

Advise:
US must work hand-in-hand with major governments to manage the reversing of interest rate environment, in order to minimize the impact of sudden currency surge of a particular country. One of it was to hike interest rate simultaneously with major countries globally. And, I believed that Obama's administration already knows it (hopefully).