Thursday, November 19, 2020

Of course we should not print more money!

When one youth leader who happens to be a Deputy Minister suggested that Malaysia should get Bank Negara Malaysia to print more money or in another sense, "helicopter money" it felt like, how come nobody thought of this. His proposal was, to get the BNM to create more money, provide them to the affected through perhaps subscription of debt issued by government. Here we go again, how come nobody thought of by drinking 'warm water" it should have killed the corona virus?

How come nobody in this world can "think outside the box" and solve these twin problems. COVID-19 and the economic disaster that comes with it. To be fair, there are countries that basically print more money, but they are not physical cash. Those countries the most famous or notorious among them - United States when its Federal Reserve literally increased its balance sheet size by a multiple of 2 from $4 trillion to $8 trillion in a matter of weeks sometime in March. The Fed then subscribed to debt issued the US government which were then be handed out to the groups in need. On top of that, there were a contentious debate where at one point of time the Fed were even considering purchasing debts issued by companies. 

Why US can do things that we cannot do? At the time, when the Fed chairman came up with the bold move, it was rather scary but that action seemed to work. Well, during then. Firstly, US will get away with these action because the greenback is largely the reserve currency for the world. Because many countries, Malaysia included are holding US dollars as part of its reserves, we cannot afford for the currency to depreciate - in the short run, especially when the world are grappling with COVID together. There is basically nowhere to run as all countries is facing a similar issue.

For many, whom would have seen how the Fed had reacted, many alternative assets were deemed to be safe haven - there we see people rushing for gold, bitcoins, shares especially the less affected ones - as many do not trust US dollars anymore. But at least that is the US currency. We just cannot let it fall.

What about RM?

Well, we are not those currencies such as USD, Euros, Swiss Francs, Japanese Yen. As someone pointed out, Malaysia is more susceptible to follow the Zimbabwe's route if we do the same. Someone who follows bitcoin will understand the brilliance of the creator - where he or she understands that anything that is created with a finite number will be of value as long as it becomes a currency where people would want to hold. My belief is how many digital currencies can people create. That is infinite. Hence, we do not know human being's limitation to create. While Bitcoin can have a finite number, digital currencies itself is not. The debate is still on.

If Malaysia prints more money, we will be a small developing country which many around the world would not put the trust on. We are possibly doomed economically. Inflation would be uncontrollable, and Ringgit would be worthless.

What should we do then?

At this time, there is no choice but to increase the supply of money and hoping that its velocity of spending improves as many are just unable to spend, given the fear and lockdown included. We have seen the success of loan moratorium. During then, we still were able to see people are looking for ways to spend more as they suddenly have extra cash. While some would argue that one should not pamper those who are less affected with more short term cash and only concentrates on those that are affected, I do not agree. Provide loan moratorium to all except for those whom request for exemption. Do it the other way round! Rather than just give to the ones that need it. Extraordinary times call for extraordinary measure. For a while, take away the thought that people can misuse the leeway of extra cash as we need all the cash rotations that we need.

We need the ones that have jobs to support the ones that have not. That is not done by increasing taxes but get the people to spend more. Extend loans by another year. After all, the year 2020 felt like it is almost a non-existence in terms of growth. 

Increase working age by at least another year i.e. from 60 to 61. Better still 62. We should get people to feel that they can have the opportunity to work longer to save the lost year(s). The feeling itself for many helps. Whether people really work until 62 is another matter. At least they have that assurance.

For those measures to work, I believe the banks would be able to absorb, after all I think during this times, new loans issued should be slower as banks would be more careful. It will not be a lost to the banks. For the hire purchase losses, maybe we should change the rules as the 6 months free interest should have stopped and the banks have already absorbed the losses.

With us getting the ones that still are capable to help the ones that have lost their jobs through consuming, I think that will help to create more jobs unintentionally. (Maybe intentionally)

There are however those that are affected even without these consumption fueling measures. Those are the airline workers, school bus drivers, school canteen operators. I am sure, the government should have enough information to know who are affected. During these times, we should not be lazy to go down to the details of those that are affected. Money should not be given free to all, but the affected many. The EPF's decision to allow drawdown for those affected is the right one, but with more of the budget that are given to those affected, I think the EPF's drawdown will be less needed as these should be deemed as long term savings.  

Another thing that we should do is to convert the credit card interests into at least 36 months fixed loan with much lower interests - not more than 6%. These are times where banks should not take advantage but to extend their loan loss provisions. Put a cutoff period and limit. Limit that to 2 credit cards per individual or by amount. I would think the banks today have no problem with deposits, just that it will have higher loans provisions in the future. Still it should be able to withstand.

Like many have said, these are extraordinary times. We cannot just do the same old, but definitely not helicopter money!

Tuesday, October 6, 2020

Why the Ecoworld-UEM deal is a better deal for UEM than Ecoworld

We have been hearing that Ecoworld is looking for financial support through some of the blogs and comments that came from political parties. It has been deemed as a rescue on Ecoworld as the company has a substantial debt that it is looking to pare down. For a while, as Ecoworld has been building its base, it has leveraged, and now it seems this has taken its toll on the company during the worst of times to leverage.

Property market has been bad for a while since probably 2015 when Bank Negara reduced the allowance for retail debt making the property market went spiralling down. While it has taken its toll, Ecoworld with its very confident management continued to grow, partially from its own money with debt together.

I for one have been impressed with the way the group has been building its brand. Today, it is probably one of the better brand in Malaysia. Of course, with the depreciation of oil price in 2016 and Covid in 2020, these events have been problematic for Ecoworld. MCO itself has caused the company to not be able to build its properties for almost 3 months. People will be careful in buying properties given the situation moreover. Additionally, it will have more challenges selling its properties to overseas client.

Ecoworld's latest balance sheet position

As seen from diagram above, Ecoworld's balance sheet is not in good position. However, to get out of it should not be through merger as I would deem it as a rescue on UEM rather than Ecoworld. 

I still think Ecoworld can get out of the debt trap as long as it continues to deliver on its projects and through making a decent amount of new sales albeit lower as compared to previously. It claimed that it has RM3.36 billion of unbilled sales. Given that situation, I still think it is a situation which it is able to solve. If it is able to deliver on its projects, I believe the new injection of funds will materialise. It needs some time to show the results.

Let's visit the situation that UEM Sunrise is in. For a while, UEM has not had a strong management as well as performance. It is much more dependent on Johor than Klang Valley. Its gearing position is not much better off than Ecoworld although its liquidity position is better with RM1.35 billion cash. Because of UEM is a much older company with past records from the old Renong days, its book value is probably understated. That are the two advantage given that Ecoworld is doing an exercise with UEM Sunrise.

However, as we know during times like this liquidity is important but in the longer term it is the deliveries of sales, projects, better pricing etc.

What Khazanah is taking advantage of is the predicament that Ecoworld is facing and it is taking action. By proposing a merger, it is taking advantage of its long term problem by doing a merger which should not be deemed as a rescue. 

For Ecoworld to take up this deal, it is probably facing more challenges in the future as while Khazanah has been in the past taken its hands off from the management, it does not mean it will not meddle especially on matters such as land issues and development.

Hence, I think while it is for the short term resolve of its issues for Ecoworld, I do not think it is a good deal for Ecoworld in the long run. For UEM, it is quite the opposite.

Good twist of questioning by Noelle Lim on BFM on Sasbadi CEO

 I liked the way Noelle changed her question when she interviewed the CEO of Sasbadi. I am sure that the CEO was not going to be frank when he was interviewed especially with questions on the competitiveness of our students especially on PISA test. He was questioned as well on teaching English in Maths and Science and it was clear that the CEO was not going to be frank preferring to protect his business rather than being forefront on it.

On the prospect of Sasbadi, to be frank given the experience that I have gone through in teaching my children during the MCO, I do not see a positive light of school text books. In fact, during the short period as mentioned by the CEO, the business is affected due to their inability to push their books through the schools. This means whenever a parent like me go to a bookstore, we have much more options. In fact the options is even more prevalent when I go online.

Quite a number of the old traditional business channels and methods will be affected especially now the choices have opened up.

Sunday, August 30, 2020

Highway trust is probably the way to go

One of the failings of the previous PH government was that it went full length for its fulfillment of the manifestos without thinking of its consequences. One of it was the abolishment of tolled highways which obviously is not possible. During the 22 months in power, there were 2 main proposals - lengthen the terms of PLUS highway while reducing and maintaining the rates and buying over the Gamuda owned highways. The first they managed to complete while the second I think it would not happen given the situation today.

The plans I would say were not thought of holistically. We now hear that the government is proposing to put together a trust and plans to put in total up to 35 highways into the trust. If I am not wrong, this would make more sense if the government is trying to reduce toll rates for the highways.

Although the plans are still vague, in my opinion the following would be part of the plan.  

The Malaysian highways as I have mentioned many times are complex asset and shareholdings situations. The major shareholders of the highways are consisting of important players such as Khazanah, EPF, PNB, Gamuda, IJM and many bond holders. One must know the holders of highways actually are people's funds to an extent that Gamuda and IJM are held largely by Malaysian funds. We cannot terminate the contract as it would have impacted all of the above - government and people ownership related - not to say the sovereign trust of a country. How do we address the situation without impacting the players actively. A trust fund!

How should the trust fund work then? It is important to note that I am only 1 single individual whereas the government has many corporate thinkers and planners looking at it. Lets say from the 35 tolled highways, the total capital value is RM100 billion. To make the trust workable, Malaysian government would create a something like RM25 to RM30 billion highway trust funds - bond and equity (mainly government) combined. These money would only do 2 things - invest into existing and future highways, and pay dividends to bondholders and shareholders. The shareholders would be Malaysian government largely.

Additionally, the trust fund should not be profit oriented and it should also not be operator of highways. Its role is to purchase off about 20% to 30% of all highways from the current highway operators at the current market rate (with small discounts). The current highway operators shall be allowed to maintain the highways themselves while also be holding a significant controlling stake. This means that the highway trust through the government is a participant of the business but they are not involved in the daily decision making.

How does it help to reduce the toll rates then - where it can help the rakyat?

As most highways are usually profitable and cashflow accretive, they will pay good dividends to the shareholders. The trust fund being a shareholder will be receiving those dividends. The money received can be reinvested into the highways or it can be used to fund the subsidy on the price increase of the toll roads. As we know, many of the tolled highways are already being subsidised. In the past, it came from the government coffers directly i.e. from the yearly budget. Through the trust fund, it can still be directly from the coffers (i.e. partially from the dividends received) or through the extra unutilised funds from the highway trust fund.

Another additional structure which the government can do is to create a REIT like trusts for the highway owners. Through this the already completed highways (mainly) can get this highway REITS listed, where the government highway trust can invest into. This will enhance the capital as well as the bond market as now those are lacking.

Highways are allowed to still compete but at least they compete in the areas of service rather than price. Future and maybe even current technologies such as e-payment system will enable this concept to work better. I do not think in future highways tolling will be fully eliminated but perhaps some small fees will be charged (much like parking charges by municipals) to upkeep the roads. These revenue can be forwarded to the highway trust fund.

Through this method I think the concept of managing and keeping the tolled highways manageable for both users and subsidy providers (government) can be better afforded.   

Monday, June 8, 2020

Why is the stock market doing fairly well, while we expect economy to go into recession

There is no doubt the economy globally is getting into a recession. Technically, recession is when an economy faces a decline in two consecutive quarters. Most economies are facing lockdowns situation between the end of first quarter and second quarter of 2020. That by itself would have caused a technical recession for the 2 quarters. For some economies that are dependent on foreign purchases of our services, goods (such as Malaysia, Singapore, Thailand), even if we do well for our local economy, lower demand from overseas would cause a recession nevertheless. What is in most economists and government would be not to allow prolonged recession which is what we termed as depression. In short today, the argument is to whether we are moving into a depression or not and how to prevent it.

This time around people have been shocked by the so-called disconnect between the general economy (which we called Main Street) and stock market. In US, while technical unemployment is registering close to 20%, its Wall Street (stock market) is actually registering record numbers (Nasday which is mainly for technology stocks). Many stock markets although have not been registering as good numbers as Wall Streets, it nevertheless has rebounded and seemed to be doing well. KLCI which is the main blue chips stocks in Malaysia, is not at 1,556 points after touching a low of 1,219 on 19 March 2020, days after the Movement Control was announced. Our peak was about 1,878 points, the period when oil price was still registering above USD100. Hence, I would call it that the market is now at midpoint. However, the economy is seemingly going to suffer beyond the mid-point level for the stock market as we suffered a what I would call a double whammy - COVID-19 pandemic and low oil price (our economy is dependent to a large extent on oil).

Now the question is why is the stock market holding up? Here are a few explanations.

Emergence of retail investors

I have been investing in the market for a while. The last time I have seen the huge participation from retail was 1997 - prior to the last major Asian financial crisis. During then, we were trading at what we called T+7, which was we only pay 7 days after we made our trade. Today it is T+2. Hence, during then a lot of people were playing contra - where we do not have to pay for the trade until many days later. Hence, during the trade, if the stock rises, we do not need to pay any money for the purchase. Since the crisis, with EPF (a very large fund) started to come into the stock market, retail players started to dwindle. The market has been largely determined by how EPF and several smaller others wanted the market to be (together with smallish foreign institutional funds).

The emergence of the retail investors seemingly is appearing from the lockdowns. I have started to hear doctors, lawyers, young professionals, executives started exploring the market. I call this healthy as it is obviously a financial lesson for many of them whether they made money or not. (I am not worried of rich doctors losing money in the market and started learning about fundamentals - they can learn fast)

One of the stockbroking license holder which focuses on retail (Rakuten) for the first time experience profits. Now, whether post COVID-19 these retail investors remain. I hope so, as the market is starved of new groups of investors. Imagine, how eager for us to hope for this group while these new investors whom have been looking at other asset classes such as bitcoins, forex are now putting some attentions on stocks. The focus now is for them to make money over the long term rather than losing and leave.

Stocks as alternatives for other investment assets

As mentioned above, while the younger generations have gone into other kinds of investments, this time around those alternatives are not doing well. Those includes commodities mainly and to a smaller extent bonds.

It helps when in US, the largest of the stocks such as Amazon, Microsoft, Netflix are expected to report record numbers. In Malaysia, those are the rubber gloves companies. It does help to spur the stock market economy as there are no substitutes for investing into rubber gloves companies if not investing into the stock market. Similarly, there is no other way to invest into Amazon.

Flush with liquidities

The Federal Reserve of US is throwing $4 trillion or more into the economy. We are far, but we will get some as well. In Malaysia, we are getting hundreds of billions of stimulus cash or other forms. Imagine if the banks tell us we do not have to pay our loans for 6 months, we suddenly have extra cash. That is probably where money will flow into the stock market. At the same time, when we cannot spend outside of our homes, we may buy some goods online, the remaining some would probably go into the stock market. Profits feed more liquidity into the market and this time around the liquidity is into the hands of the small guys rather than the institutionals - which is good.

In addition, when the system is flush with liquidity with the Feds printing money, it also means the cash we hold has come down in value. This encourages even with the complex investment thoughts not to hold cash in the long term as the money they hold would lose value.

I have been chasing where the money has flowed to - however I have missed out that it actually moved from the banks (system) to the hands of the consumers but some of it ended up in the market. I have originally thought that the institutional guys (such as funds) would be keeping funds to pick up the debt instruments. It has yet to really happen.

Market valuation is a not a fix situation

One of the reason I have never put a price onto a stock - although I generally think what a price would be for me to be interested. When interest rates go to zero in US and in Malaysia, dropped by more than 1%, that investments or savings would tend to move somewhere else. The opportunity investments from bonds or fixed deposits would be other asset classes. In finance, we call this risk free rates. So now risk free rates has dropped, so when we do a discounted cashflows, the other alternative asset would increase in price. Example for this, risk free rate drop to 2% - generally this means I am willing to take risk of a straight line PE (better still DY) of 50x (not encouraging the thinking that a 50x PE is a fair value but just as example). In the past, when risk free rate was 4%, that PE I was willing to tolerate was 25x. That is a 1 single X factor increase.

Will this trend last?

I hope it does last long enough. Nothing beats the need to rekindle or beefing up the Main Streets. However, the market itself can play a role as happy investors will translate into happy consumers. This is the way generally the poorer income group (here we call them B40) can get helped besides giving cash alone.

The financial economy (includes capital markets) is also a part of the economy, and we need to get this to be more active.