Country Default Risk

The Dubai debacle has prompted Bespoke Research to put up the various country risk of default. There are CDS being traded that measures the cost of insuring $10,000 of country debt for 5 years. If you look at the table, Dubai's cost is $541, which is comparatively a lot better off than say, Argentina $985, Venezuela $1,170. However, $541 is a very very high figure. You can get a sense of just how global traders view Dubai's risk of default by looking at countries that are a bit cheaper to insure: even the hellish Iceland is at just $398, however that has dropped from a highly precarious $976 at the end of 2008; the problematic Russia cost only $218.

Surprisingly, Indonesia's risk to insure is very high at $231. Malaysia looks like a hero among these countries, costing only $117. The risk traders are not stupid, they do look at everything, they have China at just $87.

The USA still have its reserve status firmly intact, despite the recent rumblings over the dollar and the furiously overworked money printing press by the Fed, it only cost $32 to insure. Australia is at a highly enviable $34.

I should really start to trade these country default CDS. I think on a 12 month view, my likely preferred trades in my order of attractiveness would be:

1) Buy Japan at $81 (buy as in hoping that the cost to insure would go much higher over a 12 month period).

2) Buy US at $32.

3) Buy Australia at $34.

4) Sell Indonesia at $231.

5) Buy Egypt at $241.

6) Buy Mexico at $159.

7) Sell the Philippines at $208.

Funnily enough, I cannot really place a bet on Malaysia, don't really have a strong clue up or down ..lol. Even curiouser was that I have a better sense of countries where their risk is seeming rising, but not as strong a conviction for countries on the improve.

Oh, to explain my top 3 bets: Japan's public debt is actually quite insurmountable and is reaching a climax - they keep having to change the Prime Minister because no one has the political will to effect the changes, something's gotta give soon; the USA reserve status is overstated, and while I think the status will remain, it won't be as strong as before and a gradual realignment is necessary (i.e. weaker dollar) to get the country on a proper debt reduction diet; Australia's euphoria is largely centered on China's state funds voracious appetite for resources, I do not expect that to go unabated, a lot more downside than upside from here, I expect the OZ government to be a bit more restrictive in "selling natural resources" to China in the months ahead.

p/s photo: Olivia Ong

Keep An Eye On Magna Prima

Well, I cannot really put this under "Why I Like..." category, but I would say that Magna Prima bears watching. Things seem to be 'happening' in the near future for this counter. Magna’s earnings in the near-term will continue to be underpinned by its Magna Ville, Dataran Otomobil and U1 Shah Alam projects, which have a combined unbilled sales and outstanding construction orderbook of more than RM200m.

Things which have piqued my interest in the counter:

a) Two catalysts for future earnings growth would be the successful launch of its Magna City
project and the impending mixed development project along Jalan Ampang in KLCC.

b) Magna Prima is earmarking its recently acquired 6.95-acre site in Petaling Jaya's Section 5 for the development of "lifestyle-themed" projects. The acquisition is in line with the group's corporate move to enlarge its landbank and develop in strategic locations with high population, easy accessibility and potential for projects with significant gross development values. Situated in the Petaling Garden neighbourhood, the land is close to the high-traffic thoroughfare of Jalan Gasing and PJ-Kuala Lumpur border with a nearby link to Jalan Klang Lama. It also has the advantage of the lush green backdrop of Bukit Gasing. The site is made up of two contiguous parcels of 180,736sq ft and 122,260sq ft purchased from Petaling Garden Sdn Bhd last month for RM48.8 million or RM160psf. It also includes a row of 15 tenanted single-storey lock-up shops along Jalan 5/44.

c) On 16 July 2009, Magna Prima entered into a conditional agreement with Seri Dinar Project Development Sdn Bhd to buy from the latter 5.56ha of freehold land and parcels of leasehold land totalling 6.79ha in Gombak, Selangor, for RM40.5mil cash. Magna Prima said in a filing with Bursa Malaysia that the group’s development plans, for which Seri Dinar has obtained a development order, comprise shoplots, apartments, houses and a clubhouse. The estimated gross development value is RM130mil, of which the gross profit margin is expected to be about 20%.

d) Magna Prima has recently appointed former minister of national unity and social development Tan Sri Zaleha Ismail as its executive deputy chairman.

e)Developer Ho Hup Construction Company Bhd has appointed former Magna Prima executive director Lim Ching Choy as its group managing director. Lim has also served as Mah Sing Group Bhd's executive director before. The direction for Magna has turned uncertain with the departure of its CEO, Lim Ching Choy. Lim, an ex-banker with experience in turning around Mah Sing previously, was in fact one of the prime catalysts which some thought would turn Magna around and nurture it into a successful major developer in the long run.

f) I am not sure losing Lim is really losing Lim. It could very well be things looking up for Ho Hup and Magna Prima. A couple of months back Ho Hup said it will be launching a RM1.75 billion commercial cum residential development called Jalil City in the area in the next six to nine months. The 60-acre "jewel in the crown" of the 153-acre freehold Bandar Bukit Jalil is planned to be developed in two portions. One facing the Bukit Jalil Highway will have a 9.15-acre hypermarket (to be taken up by Giant, Carrefour or Tesco when Ho Hup decides which is offering the best proposal) and 175 units of four- to eight-storey shop-offices with lifts (priced from RM2.5 million, resulting in a gross development value of RM600 million). On the other portion facing the Bukit Jalil Golf and Country Club, there will be an eclectic blend of a lifestyle piazza with food and beverage outlets and entertainment venues, an office tower, condo hotel and 1,800 serviced apartments.

g) The trouble is Ho Hup is in pretty distressed level. Its paid up is 102m shares and its current market cap is just RM60m. While Magna Prima has 53.5m shares and a market cap of RM112m. Why would Lim leave for a company half the size of Magna Prima? Plus Ho Hup has lost RM46m and lost RM57m in 2007 and 2008 respectively. While Magna Prima made a net profit of RM23m and RM24m in 2007 and 2008 respectively. I am guessing here, but could Magna Prima be a prime beneficiary of Ho Hup's RM1.75bn venture?

I have been looking at Magna for the past few days and the share price has been having some action but too erratic for my and thin for my liking. Sometimes you just have to NOT swing the bat at every pitch ... know what I mean.

NTA/Share (RM) 2.30
Book Value/Share (RM) 2.30
Issued Share Capital (m) 53.5
52-week Share Price Range 3.30 - 1.77

p/s photo: Olivia Ong

Financial Times Article On Nusajaya

It is always interesting to see how foreign media view Malaysia. This is the latest article from the influential FT paper:

More than $13bn has been committed to an ambitious plan to create a metropolis at the southern tip of Malaysia three times the size of Singapore, says the chief executive of the state agency set up to drive the project.

Arlida Ariff, chief of Iskandar Investments, told the Financial Times in an interview that a further $2bn was likely to be committed in the next two years, including nearly $300m in retail investment expected to be announced over the next few months. Ms Ariff said the 2,217sq km project, launched in 2006 by Abdullah Badawi, former prime minister, was beginning to make “real progress” as contractors drove highways and other basic infrastructure through thousands of hectares of jungle and abandoned palm-oil plantations in the state of Johor.

In the long-run, the biggest single source of investment is likely to be Singapore, whose central business district is not much more than half an hour’s drive from Iskandar’s proposed financial district. The attraction for Singapore is the low cost of land, office space and housing, which are currently about 80 per cent cheaper in the Iskandar economic zone. Lee Hsien Loong, Singapore’s prime minister, has joined Najib Razak, his Malaysian counterpart, in backing the project.

However, a surge of Singapore investment could raise nationalist hackles in Malaysia, which has had a prickly relationship with the island state since the two split in 1965 after a brief union.

Mahathir Mohamad, prime minister of Malaysia for 22 years until 2001, last year dismissed Iskandar as little more than a platform for Singapore to extend its sovereignty into Malaysia, warning that Malays would be “driven to live at the edge of the forest”. Ms Ariff said such fears were overblown, pointing out that Singapore had always been the largest investor in Johor because of its physical proximity and requirements for crucial goods from the state, including food and water supplies.

Much of the investment Iskandar is seeking would help Singapore companies by allowing them to expand locally at low cost, she said, suggesting that the initial ambitions of the financial centre were limited largely to attracting back-office activities such as data processing centres.

“This means we can work in collaboration with Singapore rather than competiting for the same brands and the same products to come across [to Malaysia]. Some of this [fear of Singaporean involvement in Iskandar] is to do with the traditional rivalry. Singapore used to be part of Malaysia and it’s like watching your kid brother grow up and become more successful than you.”

The project has attracted a clutch of Middle Eastern investors including Mubadala Development, Abu Dhabi’s state investment vehicle; Kuwait Finance House and the Kuwaiti Bank. Other investors include Newcastle University of the UK, which is setting up a medical school, and UK-based Merlin Entertainments, which is building a $220m Legoland theme park.

Ms Ariff said several other investors were in negotiations, with three more university campuses dedicated to engineering, logistics and leisure industries likely to be announced before the end of the year. Investors are being offered a raft of incentives, including a 10-year corporate tax holiday and exemption from rules requiring local participation in foreign-owned projects. However, the project remains well short of the target of M$383bn over 20 years that will be needed to finance the planned doubling of the local population to 3m, a 1.5sq km financial district, eight university campuses, theme parks, hospitals, schools, retirement homes and a resort.

p/s photo: Olivia Ong

Update On Asian Equities

Overview: Asian equities have outperformed mature markets in 2009 thanks to continuous foreign institutional investor (FII) inflows amid diminishing risk-aversion among global investors and relatively resilient macroeconomic fundamentals. In September, markets continue to march upwards after seeing some volatility in August, driven by concerns that the Chinese government is tightening the credit.

As of MSCI Asia Pacific has gained 30.5% YTD as of September 16, with Sri Lanka and Indonesia as the best performers, Japan and New Zealand as the worst performers. In terms of valuations, Asian equities are no longer considered to be cheap, following the rally since March. The region's price/earnings ratio has risen significantly above its historical average. In addition, downside risks still remain in H2 2009 with revival of any global risk aversion. Economic recovery may be slower-than-expected if stimulus effects fade out and the current global recession has greater-than-expected impacts on regional economies. Also, corporates may post worse-than-expected earnings reports as Q2's improvements were largely driven by cost-cutting efforts not by a recovery in demand.

Will Asian Equities Continue to Outperform Mature Markets?

2009 MSCI Asia Pacific performance in USD terms: 30.5% YTD as of September 16, up 66.6% during March 9 - September 162009 MSCI Asia performance in USD terms: 26.7% YTD as of September 16, up 61.2% during March 9 - September 162009 MSCI Asia (excluding Japan) performance in USD terms: 54.8% YTD as of September 16, up 85.4% during March 9 - September 16Best performers (YTD as of September 16, 2009): Sri Lanka: 91.9% | Indonesia: 80.0% | Vietnam: 76.5% | India: 72.9% | China: 64.8% | Taiwan: 62.1% | Thailand: 57.9% | Pakistan: 55.8% Worst performers(YTD as of September 16, 2009): Singapore: 51.8% | South Korea: 49.7% | HK: 48.8% | the Philippines: 47.8% | Malaysia: 38.4% | Australia: 24.9% | Japan: 15.9% | New Zealand: 15.4%

In 2009: Asia's equity market (excluding Japan) have outperformed mature markets, up 54.8% YTD as of September 16 2009, while the S&P 500 Index and the U.S. Dow Jones Industrial Average rose mere 14.7% and 8.4% respectively during the same period.

Since March 2009, Asian equity markets have witnessed a rally following a surge in U.S. markets and began to benefit from the widening valuation gap on the back of relatively resilient macroeconomic fundamentals. During the March 9- September 16 period, MSCI Asia (excluding Japan) rose by 85.4%, significantly higher than the S&P 500 Index and the Dow Jones Industrial Average which gained 58.0% and 49.6% respectively.

Capital flows: Continuous FII inflows to Asian equity markets have taken net flows to a positive US$14.4 billion as of June 24 2009, significantly up from US$10.8 billion in H1 and US$9.6 billion in H2 2008. Since end-June, however, fun flows have been volatile, with inflows and outflows each recoded half of the time. In the middle of August, the region saw fund outflows the most in 24 weeks as investors start to cast doubts on Chinese rapid expansion of bank lending, which has helped regional economic recovery and asset market reflation.

Valuations: Taiwan (122.8) has the highest price/earning ratio in the region as of September 9 2009, followed by Australia (83.9). In opposite, valuations of Pakistan (12.4) and the Philippines (15.1) are among the cheapest. The P/E ratio of 32 for Asia (excluding Japan, unweighted) is significantly higher than that of U.S. equities, 19.1 for the S&P 500 and 13.7 for the Dow Jones Industrial Average.

2008 Review: The peak-to-trough decline in Asian equities in 2008 (more than 70% for some markets) surpassed the 60% fall in local currency terms during the 1998 Asian financial crisis. Sustained outflows from offshore Asian funds took total net redemptions in Jan-Oct 2008 to a record high such that all money that flowed in during 2007 flowed out.

Market Integration: There is a noticeable upward trend in the Asia-U.S. correlation with the correlation parameter picking up sharply in H2 2008 (peaking during mid-Oct 2008). However, average correlations for emerging Asian equity markets are generally higher between the region's markets than with U.S. markets.

Government intervention: Several countries including Taiwan, Pakistan, Vietnam, Thailand intervened in the stock market by narrowing the trading band, introducing stabilization fund to contain volatility, banning short-selling, directing government funds to buy share.

Will the Rally Continue? Or Will a Correction Follow?
Upsides: Better-than-expected earnings reports, relatively healthier macroeconomic fundamentals, aggressive fiscal stimulus spending and ample liquidity in the region would have positive impacts. Also, buying into most of the region's equity markets seems a better bet than bonds amid increasing bond issuance.

Downsides: Worries over the U.S. economy, exit by local investors and also FIIs alarmed at greater-than-expected impact of global slowdown on Asia's growth, exports, fiscal deficits, slowing consumer spending and investment may have negative impacts. High (external) debt exposure of corporate sector in some countries and risks of real estate correction and bank profitability are additional risks.

Global portfolio rebalancing toward U.S. equities, expecting "a U.S. growth spurt," will pose risks to Asian (exculding Japan) equities. U.S. equities have gained much less than Asian (excluding Japan) equities and have lower valuations.

The recovery is real. Asian equity markets will continue to have good momentum and corporate earnings may rise substantially until 2010. Liquidity conditions will support the equity market in the near-term. But authorities may have to limit further monetary and fiscal expansion as inflation may resurface before growth normalizes in the medium- to longer-term.

Risks remain, driven not by earnings but by still weak real economy. Exports and domestic demand should rebound quickly in H2 2009 to meet the forecasts and to justify V-shaped recovery. In the past, Asia's stock market performance was highly correlated with that of western counterparts. However, Asian equities may plot a more "independent course" backed by less leveraged economy, better capitalized banking sector, huge FX reserves and healthier fiscal position.

Prospects for further inflows into Asian equities remain substantial, as global portfolio continue to adjust from relatively underweight positions, and given cheap equity valuations relative to bonds.

Adrian Mowat, Chief Asia Strategist, JP Morgan: Asian stocks have yet to reflect expectations for a powerful, synchronized recovery in the global economy as markets are still bearish on global growth and on emerging markets growth.

As of end April 2009, market capitalization of Asian Pacific markets (US$10.2 trillion) has come ahead of that of European markets (US$9.3 trillion, including Africa and the Middle East) as Asian stock prices sour at a faster pace than European ones.

Banks remain the single largest sector in Asia. However, its share has been decreased to 20.1% as of June 2009 from 43% in 1975. In opposite, the share of cyclicals has risen to 38.7% (including basic materials, industrials, oil & gas and technology) from 18% (industrials) in 1975.


p/s photos: Olivia Ong