Anything Wrong With This Picture?

Credit Suisse is organising its annual Asian Investment Conference on March 22-24 in HK. Let's see if you can suss anything wrong with that.

Keynote Speakers

Keynote Speakers (listed in order of appearance)

• Kamal Nath, Minister for Road Transport and Highways, India
• Korn Chatikavanij, Finance Minister of Thailand
• Martin Feldstein, George F. Baker Professor of Economics, Harvard University, President Emeritus of the US National Bureau of Economic Research and member of the US President's Economic Recovery Advisory Board
• Laura D’Andrea Tyson, Dean, Haas School of Business, University of California at Berkeley and member of the US President's Economic Recovery Advisory Board
• Dato' Sri Najib Razak, Prime Minister, Malaysia
• Norman T.L. Chan, Chief Executive, Hong Kong Monetary Authority
• Eisuke Sakakibara, Former Vice Minister of Finance for International Affairs, Japan; Professor of Economics, Waseda University
• Zhu Min, Deputy Governor, People's Bank of China

See anything there yet? OK, let me throw in another fact, what if the country head of CS Malaysia has been giving out as gifts to all intending participants (mostly institutional fund managers) Barry Wain's The Malaysian Maverick: Mahathir Mohammad, which was and still is banned in Malaysia. Do any of you see anything wrong with this picture?

None... well, what if I tell you that the PM is expected to address the Invest Malaysia conference in KL at the end of March, one that is "government sanctioned" and involved Bursa Malaysia, Nomura and Maybank as main organisers. The event is "supposed to see our PM launch and address the new economic model. Anything wrong with this picture?

I have a few queries:

a) Why is our PM there to meet fund managers? I shake my head. I don't see other heads of state meeting fund mangers. This is so obviously NOT the PM's decision, obviously he has been ill advised. Do we REALLY need foreign funds that badly??? Do you think Singapore's PM will EVER meet fund managers at a conference??? It is a bit embarrassing, really. I am sure there are bigger fish to fry, why even bother, its just index stocks we are talking about. Foreign funds will come in when its cheap, they will leave when its not. There is no need to court them. We all know why they are not in Malaysian stocks, and meeting them will not do the trick - but doing the "other important stuff" will change perception.

b) Why is CS giving out a banned book to the intending participants? Is it to say that "yea, Malaysia is ok with everything, I can invite the Malaysian PM, and still give you guys the book that is banned in the country AT THE SAME TIME". I do not like Mahathir one bit, but if the book is banned in my country, and if I am the PM, you should not really throw this in my face. Maybe the country head thinks he knows Malaysian politics and sensitivities better than I do, I don't know. Let me give you a better metaphor, assume that I am Muslim Chinese, and you invite me to your house as main celebrity guest and speaker, and you serve pork as the main dish ... I am not debating whether the book should or should not be banned (personally I think the book should be allowed in), but how we are treated and regarded. If I am a devout Muslim Chinese and you invite me to your house as the main speaker and guest of honour, you should not have Victoria Secret models dancing and singing just before my speech. Wakarimastaka?

c) The PM was obviously ill advised because you have a more important date at the end of the month. From the grapevine, members of the Invest Malaysia committee have put their case to the PM and asked him not to go, but somebody else more 'powderful' said its better to go. Its like I directed and produced Avatar, a pure all Malaysian made movie and the grand premiere is end of March in KL, ... suddenly I am also doing another premiere in HK??!!! Who is going to attend the KL event? Will the PM be touching on the new economic model speech? I am sure he will be asked to anyway in private - why preempt the announcement? Even if you are not going to talk about the new economic model, why even talk about "Malaysian investing" at all a week before the big launch and big speech?

Below was my posting on how we "inflate" the value and perceived "attractions" in having foreign funds in our markets. Unless they are long term PDI in to build factories and reate jobs and industries, anything else is short term in nature, be it 6 weeks or 6 years even. Think again people ...

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Saturday, August 23, 2008

Foreign Funds, Buy Me Please!

What is this fixation among some Malaysians that foreign funds must/should buy Malaysian stocks? Is it a self-esteem issue? That somehow “they love us more” if they buy? And if they don’t, it means “we are not worthy”? Please lose the pre-independence, second-class citizenry, developing country mentality.

A stock market is just a structure where shares are bought and sold. Whether foreign funds come in or not does not mean we are running companies with “world’s best practices/standards” or that we are making strong strides in the respective industry’s competitive landscape. No, it does not mean that at all.

Funds will flow to places where they can make money, be it Vietnam, Indonesia, South Africa, China, Turkey, Egypt, etc. I doubt many of these markets are practising “world’s best practices/standards”, or have credible market openness or strong liquidity.

People buy stocks that they think are going to give good returns. Even if we have very good companies, people may not buy because we may be overvalued already.

There are tons of options for the global investors, and the Malaysian market is just a little thing.

Get over yourself. Do you know how big the Malaysian stock market is? Take any one of the top 10 market cap stocks in the US and you will see that it is bigger than the total market cap of all 1,000-odd companies listed in Malaysia. As a matter of fact, foreign funds ignoring smaller markets can be perceived as a good thing!

Foreign investors will only invest if they think they can make money. If they cannot, maybe the Malaysian stock market is fully valued or overvalued. Or it could mean that the local funds/institutions and local private investors have snapped up all bargains — leaving no room for the good stocks to be “undervalued”.

We could also argue that when foreign funds and research houses issue a Buy on a certain country, it’s because the local funds/institutions and local private investors are not savvy enough to pick up undervalued stocks. So which is which? Do you want a back-handed compliment?

Attracting more foreign funds is not so straight forward. Do you work it out based on a percentage of the market? What level would we be comfortable with? If foreign funds own 10% of the market cap of Bursa Malaysia, is that too low? What about 30%? Too high? Should we put in protectionist policies then?

We don’t even know where our “comfort level” is, and what should be our strategy? So why even bother trying to attract them?

Too often, we are just reactionary in our policy making. We see an issue and we address it, but without proper thinking and strategising over the big picture. And then when it hit road bumps, we react with more policies! But why are we doing this in the first place?

Let’s look at the stocks with the largest foreign shareholdings (as a percentage of the company’s shares):

Public Bank Bhd 11%, IOI Corp Bhd 9.4%, Bumiputra-Commerce Holdings Bhd 9.1%, Sime Darby Bhd 8.4%, Genting Bhd 7%, Tenaga Nasional Bhd 6.4%, Resorts World Bhd 5.3%, Malayan Banking Bhd 5.2%, DiGi.Com Bhd 3.4%, Kuala Lumpur Kepong Bhd 2.8%, AMMB Holdings Bhd 2.7%, Telekom Malaysia Bhd 2.5%, and Gamuda Bhd 2.5%.

I don’t know about you but from the list it appears that foreign funds have basically been exiting a lot of their usual positions. Sime Darby and IOI’s levels may be even lower now following the CPO (crude palm oil) sell off over the last three weeks.

On another point, some companies may not really have foreign investors.

The foreign shareholders may actually be the same family-controlled holdings based in some tax-free island.

When its cheap enough, foreign funds will come back. At the end of the day, foreign funds will gravitate to where there is money to be made. If you have more big cap stocks, it will allow them better liquidity as they can move in and out with size.

If you make your currency fully transactable and convertible globally, that’s good too. If you stop making ad hoc rules that limit the flow of capital, that would be very good as well. If minority shareholders’ interests are aggressively protected by the courts, that would be splendid.

If the regulators are swift to prosecute wrongdoers in listed companies, it improves the integrity and confidence in the market place among investors. If you can find ways to create more free float, that would be good as well. These are measures the regulators should address and constantly improve on — not because they will encourage foreign funds to invest, but because you have to, so as to get closer to world-class standards for the Malaysian exchange.

Foreign funds are not always right. Their presence does not necessarily mean we are doing well economically. Their presence could be inflating values as well. Foreign funds are just as likely to make huge losses.

It is a good thing to compare our performance with other markets to improve our ways, but don’t get emotional about it. They are just stock prices, not the price of your dignity or the price of our children.

Get a better perspective. True worth comes from knowing who we are. We do not need someone from outside to tell us that today we are just RM1.56 or that the next day, we are worth just RM1.10!

Don’t worry about how much foreign funds there are in our markets. Don’t worry about whether they like our markets or not.

We need to build good companies. We need to build great companies. We need to build solid corporate governance and integrity. We need to build and instill professionalism among the regulators, senior management and board of directors.

Just like in the Kevin Costner movie, Field of Dreams: If you build, they will come. But build not to please the foreign funds or to have better market velocity. Do it because that’s the right thing to aspire to for the benefit of shareholders.

p/s photos: Akumsiri Suwansook

Banks Bonuses & The Surrounding Anger

Who isn't appalled by bankers' bonuses!!! The underlying resentment is that they needed tons of taxpayers' money to steady their ships, and now that things are better, they want things back to normal?!

The general public is pissed off as there was no penalty when banks were raking in big profits pushing the very instruments that caused the financial decimation, if the financial crisis was caused by something or someone else, we may understand, but the culprits were themselves ... and when things go belly up, they go pleading to the governments for help, with a wink, wink... hidden threat that "if you don't, things will be a lot worse for everybody". You cannot hold the people to ransom, heads you win, tails you also win but a bit later.

Goldman has provided forty over percent of profits for bonuses to be paid in January 2010. Granted, Goldman is a different kettle of fish as they largely avoided the CDOs fallout, in fact they even profited from it by shorting the relevant instruments. Goldman also make most of its profits from proprietary trading, so one cannot really begrudge their hefty bonuses.

By right, its the shareholders who should be voting or complaining, if they wish to. If shareholders are not complaining, seriously, the rest of the world should not... really!!?? You can do what you like if you are a private company. When you are listed, you have added responsibilities. Naturally, one could say if a company behaves badly, shareholders should sell their stocks. If Warren Buffett were to pay himself 50% of all profits, I am sure Berkshire Hathaway shareholders would try and burn down his house, and sell down the shares.

So, where is the reality and principles involved here. I would tend to side with market forces on this. As a listed company, I do think shareholders have a role to play - if you think Goldman pays too much bonuses, then sell the shares, why protest.

The other side of it is, if you actually relied on taxpayers money to keep afloat when things are bad, then you are not really just a normal listed firm, you are a firm that have been "bailed-out" by the people... when you most needed it. If you can operate without any help from the government or the people, then by all means do what you like. But when you are intrinsically somehow dependent on the people to save your butt every time you fuck up royally, then you have to NOT pretend that you deserve all the profits you made because its the people that sustained and resurrected the fucking markets for you.

Shareholders may not be so legalistic as to SELL on principles alone, unfortunately we are not in an egalitarian society, even though that would a lot nicer. Hence on principle, on fairness and the greater good ... banks should be more circumspect and practice self-restraint, because seriously... the next time you buggers go to the well, we are going to say fuck you too, and let a few more of you go belly up like Lehman.

The trouble with all this is that investment banks have become too big, and their flow on effects and consequences are very nasty if any of them fail. The G20 should try to cut them down to size. Bring back the Glass Steagall, separate the investment banks from the consumer banking side. Then limit the exposure each bank have to each investment bank in terms of funding. Then kill off the OTC markets on derivatives, all derivatives MUST be transparent, listed and properly regulated. There must be a regulator with teeth to watch the capital requirements on these transactions. Regulation on hedge funds must be increased manifold - sigh... I hate to be a financial policy strategist, its such a thankless task.

Anyway, at least some firms are trying to behave better, read the Finance Asia article on bank bonuses:

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FinanceAsia: Credit Suisse on Tuesday announced revised compensation practices effective January 1, 2010, that will also be applicable to 2009 bonuses.

Credit Suisse is changing the mix of bonus and salary payable to managing directors and directors, such that fixed salaries will be a larger component of the overall payout for employees at these senior levels. Vice-presidents and below will not be affected. Bonuses up to $100,000 will continue to be paid in cash. Higher amounts will be subject to deferral.

For deferred compensation Credit Suisse is introducing two new instruments: scaled incentive share units (sisu) and adjustable performance plan awards (appa). Deferred compensation will be paid half in sisu and half in appa. Up to 50% of bonuses for MDs and directors will be payable in these two forms.

Sisu are similar to the incentive share units that Credit Suisse has been using for the past three years. Sisu are linked to a base share amount on a four-year pro-rata basis, which vests annually. The difference is that the holder is also entitled to additional shares, which vest after four years based on Credit Suisse's average share price over a four-year period as well as the return on equity (ROE) the bank has achieved. If Credit Suisse's average ROE over the four-year period is higher than a pre-set target, the number of additional shares will be adjusted upwards, and if it is below the target, the number of additional shares will decrease.

The appa has a notional cash value and vests pro-rata over three years. This is also linked to ROE -- it has a notional value that adjusts upward annually using Credit Suisse's ROE for that year as a multiplier. If the employee works in an area of the bank that has made losses, the appa will be adjusted downwards. For divisions that earn revenues, payouts will be linked to financial contribution. For shared services and support functions, payouts will be based on the financial performance of Credit Suisse as a whole.

This Swiss bank is also introducing minimum share ownership requirements for members of management committees and for the executive board, presumably to ensure that the net worth of senior decision-makers is linked to the performance of the firm.

Credit Suisse said the new guidelines are consistent with discussions at the Group of 20 summit which was held in Pittsburgh in September.

"At a time of strong focus on executive compensation, we are announcing a compensation structure that enables us to strike the right balance between paying our employees competitively, doing what is right for our shareholders and responding appropriately to regulatory initiatives and political as well as public concerns, " said Brady Dougan, chief executive officer of Credit Suisse Group.

Compensation for bankers is becoming a heated debate, especially in the US, where much of the population is reeling under recessionary conditions.

Earlier this year Morgan Stanley outlined a compensation plan that pays bonuses to executives over three years based on defined performance parameters for the individual and the firm.

On its third quarter earnings call on October 15, Goldman Sachs told analysts, according to a transcript posted on seekingalpha, that it was providing $5.4 billion, or 43% of revenues, for compensation and benefits for its 31,700 employees. Goldman highlighted that this was just a provision and bonus decisions would be made at year-end, but said the "accrual reflects our record year-to-date revenues in 2009".

"We're also cognisant of what's going on in the world and the pressures we're under and so we're going to try and balance those things as we work through the end of the year and we'll make our decisions as we get to year end based on the overall performance of the firm and our people," said David Viniar, Goldman's chief financial officer on the call. The third-quarter accrual was below the $6.6 billion, representing 49% of revenues, that Goldman provided for compensation in the second quarter.

Last month, at a Handelsblatt Banking Conference, Goldman Sachs CEO Lloyd Blankfein acknowledged that much of the controversy and anger regarding banker compensation was "understandable and appropriate". Blankfein went on to outline the principles governing compensation at Goldman Sachs, which include paying senior people mostly in deferred equity and evaluating performance over time to avoid excessive risk taking.

p/s photos: Melissa Surihani