Comments On October Budget

As a Malaysian business and finance site, I guess I am expected to post some comments on the Budget. You may or may not like Najib, but as a Finance Minister, I think he has the best grasp of economic and finance issues compared to the Finance Ministers we have had for the past 20 years. Normally we see funds being thrown about and that's that. He has obviously been well advised, most of the measures are well defined with timelines and deadlines.

The strategy is to focus more on what we do well, what we have inherent strengths. The overall bigger picture is to ensure higher incomes for all - i.e. moving up the value add curve. The budget was very responsible, Najib could have taken the easy route and spend and spend with abandon. There are still a lot issues naturally if we wish to move up the value curve - the most pressing has to be the subsidy mentality. We need a complete overhaul of how we view the subsidy, we need to set timelines to gradually eradicate it except for the most basic and necessary products - at the same time, these removal / reduction of subsidies need to be balance in that the most affected will not suffer too much.

The overall budget will be taken positively by most foreign research houses, it provided strong soundbites, says the right things. I would say that the stock market should surprise most with a good performance.


* Government to reduce maximum individual income tax rate from 27% to 26% for chargeable income group exceeding RM100,00. Personal relief increase from RM8,000 to RM9,000 in 2010. This means that each individual taxpayer will enjoy an increase of RM1,000 in disposable income.* Govt to allocate RM899m for tourism industry in 2010, attract more participants from UK, Japan, Korea under Malaysia, My Second Home. (The man on the street always on the lookout for more take home pay. While that is a narrow perspective, more cash is always good, and judging from our high-ish tax rates compared to the rest in the region, this is a good move.)

* Govt to speed up implementation of high speed broadband at total cost of RM11.3b,of which RM2.4 billion is from government and RM8.9 billion from Telekom Malaysia. (Very important. It smacks at our overall competitiveness. Crucially there is a dateline to rollout in KL by March next year, and the rest of the country a gradual rollout by 2012.)

* Govt proposes individual taxpayers be given tax relief on broadband subscription fee up to RM500 a year from 2010 to 2012. (Good move.)

* Govt to allocate RM9b for infrastructure, of which RM4.7b for road, bridge, water, sewerage projects and RM900m for rail. (Good addition to the "earlier stimulus package", did not go overboard.)

* Govt to look into micro insurance, takaful coverage. Premiums from as low as RM20 per month for small traders, coverage from RM10k to RM20k.

* Flexible brokerage sharing between stockbrokers, remisers. Flexible brokerage at 40% for remisers. To be fully liberalised in second stage by Jan 1, 2011. (Will allow more aggressive brokers to snatch remisiers. Expect Singapore houses to be more aggressive here.)

* Allow 100pct foreign equity stake in corporate finance, financial, planning companies from at least 30pct local stake now. (Good move although many have been doing these deals out of the country anyway.)

* For upstream petroleum companies, income tax for yr assessment 2010 based on 2009 income can be paid over 5 years. (Allows for better reinvestment and cost/revenue matching.)

* Govt to impose 5pct tax imposed on gains from disposal of real property from Jan 1, 2010. However, it will be retained for gifts between parent and child, husband and wife, grandparent and grandchild. This tax exemption will also be given on disposal of residential property once in a lifetime. (Property companies will not be pleased with the reintroduction of RPGT, but its a pre-emptive move, considering the "better leverage to borrow from Account 2 of EPF" for purchases. 5% is fair and will keep a lid on things, a hint on things that Bank Negara may be keeping rates low for a few more months. Low rates, which is necessary to keep ample liquidity in the system, is targeted to boost lending to business and create/save jobs. An indirect nasty would be channeling it to push property prices higher - the RPGT is to keep things on a more equal footing.)

* Govt proposes RM50 service tax on each principal credit card, charge cards, including free cards. RM25 for supplementary cards by January. (Could AEON Credit be affected, guess so, we really need just one card people, any more than that is license to fuck ourselves up.)

* Govt to impose RM10,000 for each approved permit to open AP holders, for distribution of AP in 2010. (Not good enough, needs to place a timeline to scrap it, say within 3 years, and the levy needs to be closer to market price of RM30,000.)

* Govt to implement fuel subsidy management system in early 2010, using MyKad, to ensure targeted groups will benefit.

* Govt to reduce maximum individual income tax rate from 27pct to 26pct, personal relief increase from RM8,000 to RM9,000 in 2010. (Cannot complain but we need the top rates to come down some more to incentivise entreprenuers. If the money makers are not making money, the ones below will not do well.)

* Govt to launch scheme for EPF contributors to use current, future savings in account 2 to get higher financing to buy higher value house or additional houses. (Need deatils but generally positive.)

* Govt to issue 1Malaysia sukuk totaling RM3b, for Malaysian aged 21 and above. 3yr maturity, with 5pct annual rate of return

* 1Malaysia retirement scheme for self-employed, run by EPF. For every RM100 contribution, govt to contribute 5pct, maximum RM60.

* Personal tax relief raised to RM7,000 from RM6,000 now for EPF contribution and life insurance premiums. (We should have a timeline, RM1,000 increase every year till RM10,000.)


p/s photos: Noon Wongsawan

Amanah Saham 1Malaysia - The Facts & Implications

Possibly the most searched phrase in Google by Malaysian users over the past few days had to be "Amanah Saham 1Malaysia". The authorities have gave out quite a bit of information but the general public still have some unanswered issues that they wish to be clarified. I have a few as well. I have to say here that I think the fund is "good in essence", however, we all should be aware of how it works:

Facts

a) Amanah Saham 1Malaysia (AS 1Malaysia), an all-Malaysian fund managed by Permodalan Nasional Bhd (PNB). As of end-2008, PNB’s AUM of RM120 billion amounted to 18.1% of the total market capitalisation of Bursa Malaysia.

b) Amanah Saham 1Malaysia is a fixed price products sell at 1ringgit per unit, like ASB/ASW/ASM, it is an equity fund with around 70% or more (of fund size) exposure to equity.

c) The fund will be invested in Malaysian companies with its yield benchmark according to 5-year Malaysian government yields which currently hovers around 3.7 to 4.0 percent.

d) AS1M will not be the biggest fund under PNB. ASB is the biggest fund so far with RM62bil fund in circulation (as per its annual report ended 31/12/08), even ASW has the approved fund size of RM14 billion. e) ASM and ASW2020 give out dividends based on the returns of their investment portfolios, which are 95% equity and 5% others. Their returns have been consistently above 6% over the years. However, this does not mean that it cannot go lower than 6%.

f) To my knowledge it is not capital guaranteed. The Securities Commission guidelines has it clearly defined that if its a GUARANTEED FUND - (1) A guaranteed fund is one which guarantees investors will get back the capital invested, with some returns (if any), or guarantees investors a certain investment return payable at a pre-determined date in the future. (2) The word “guarantee” must appear in the fund’s name. Where a fund does not comply with the requirements in this appendix, it must not use the word “guarantee”, or any other name which may imply some form of guarantee, in its name or in its promotional materials. Such a fund is prohibited from holding itself out as a guaranteed fund.

Then there is the nuanced terminology, the Capital Protected Fund (taken from the ASN site): A capital protected fund is one whose primary objective is to protect and return investors’ capital at a pre-determined date in the future, with some returns (if any). This fund will try and protect the capital but there is no guarantee, which makes it different from a guaranteed fund. I don't know about you but I found the phrase "this fund will try and protect the capital but there is no guarantee" very very uncomfortable. Might as well don't say it is capital protected.

From the prospectus it is clear that it is not a guaranteed fund, but I am not sure if its a Capital Protected Fund. Clarification please. The Capital Guarantee cannot be implied. You can only say it is Capital Guaranteed if capital can be returned at a pre-determined date, ... and ASM, ASW and AS1M all do not have maturity dates!!??

However, in the lexicon of PNB, the last few funds (including AS1M), they are referred to as "fixed priced funds".

Hence if the fixed priced funds will always have a NAV of RM1, then its actually better than Capital Protected, because even in a Capital Protected fund, you can lose out if you redeem too early) . In the case of fixed-price funds, there appears to be no downside risk whatsoever as the NAV is constantly fixed at RM1, along with the relatively high historical and stable returns. These funds have the backing of the government to create long-term and steady returns for their investors. These fixed-price funds are not to be confused with capital guaranteed funds.So there it is, its not a Guaranteed Fund, but its better than a Capital Protected Fund.

Closing Comments:

My biggest concern is when you invest 70%-90% of your NAV in local equities, shouldn't the performance be benchmarked against the FBM Composite Index rather than KLIBOR and MGS? The fact that the fund is benchmarked against KLIBOR and MGS indicate that it is primarily a "dividend based fund". The prime objective is to payout at least the benchmark or a little above that. Even so, how can you manage a fund that is 70%-90% in equities with that kind of "promised return". Equities can give you 10%-20% a year or could wipe out 10%-20% of your capital a year. Unless you manage the fund like EPF whereby you invest at least 60%-80% of your funds in MGS, then you can say you benchmark it to KLIBOR and MGS.

This would also hint at the strategy to be adopted by AS1M: the fund will be looking primarily at: proven companies with a "vocal dividend policy" (e.g. telling all that they will pay out 40% of profits as dividends every year); and they will be looking at consistent dividend policies over at least a 5 year period.

Just on what I have just mentioned, a shrewd local fund manager should consider picking up the following shares in the following order (without chasing them so high as the entry price will diminish your dividend yield):

1) Mah Sing

2) Public Bank

3) B Toto

4) Amway

5) Carlsberg

6) BAT

7) DIGI

8) The Star Publications

p/s photo: Chrissie Chau