Maybank - Has The Sleeping Giant Finally Awaken?

Malayan Banking or Maybank is Malaysia's largest financial institution. While other local banks such as Public Bank, CIMB and Hong Leong Bank have been either busy shopping for acquisitions or engaged in Mergers & Acquisitions activities, Maybank had been heavily criticized in the past for being virtually a non-player in the M & A space or expansion mode. A case in point is that Maybank's leading position is increasingly being threatened by the CIMB group, with its latest foray into a piece of China's financial market in the form of a minor stake in Yingkou bank.

Perhaps with the realization that they could no longer afford to sit on their laurels, Maybank has been hot on a shopping spree mode in a span of one week, with first the acquisition of Vietnam's An Binh Bank followed by the more controversial one, being the RM8.6billion (USD2.7b) acquisition of Bank Internasional Indonesia (BII) in which part was purchased from Singapore's Temasek, Singapore Government's investment arm. Both Vietnam and Indonesia are one of the fastest growing markets in the region.

I mention controversial is due to the fact that the price that Maybank paid for the acquisition of BII is at an excessive 4.6 times book value, compared to norms at around 2 to 3 times book value. It is probably a sign of desperation (for expansion), but it is also certain to believe that Maybank sees the vast potential for future growth in Indonesia's financial industry (backed by large population).

With this pricy acquisitions, the investment radar particularly fund managers and analyst were quick to downgrade Maybank's shares. Reason is because the deal will be earnings dilutive in the next one to two years. As such, it is not surprising that share price of Maybank has been in a severe selling pressure from the go, dropping by as much as 10% at one time before recovering to close at 6.1% down.

Question is, is this simply a knee jerk reaction or it's perhaps justifiable to look into it's longer term future?

I would like to recall the case of CIMB (or then Commerce Asset Holdings) acquiring Indonesia's PT Bank Niaga back then in 2002. At that time, the price Commerce paid was also judged to be on the high side and it's share price suffered similar fate to Maybank's, that is, it's share price came crashing down due to concern on earnings dilution and excessive premium. As it turned out, the deal became one of CIMB's biggest trumph card until today!

As such, i believe Maybank has the potential to do what CIMB has achieved. The key is how Maybank manages to add value going forward. Although Indonesia can be a risky market from a political and regulatory standpoint, it's huge market potential is simply too hard to ignore. With competitive bids from other overseas bankers, it certainly boils down to perhaps the highest bid to win the acquisition.

As for Temasek, i was told they made a handsome 5 times gain over their original acquisition cost!

For those investors with a contrarian view and a longer term appetite, i believe Maybank is worth looking into with the current share price weakness. Moreover, its current expected dividend yield is also at an attractive level of around 8%.

Market timing – fool’s gold?

THERE are those who believe you cannot possibly time the market in terms of entry and exit. Fair enough.

The random walk theory lies in the fact that you cannot beat the market over the long term. But we also have the proliferation of hedge funds where managers get a lucrative 20% of profits kicker annually on gains. If the random walk theory is correct, then the “hedgies” would be a terrible business to be in.

The out performance relative to the benchmark is called the alpha. Hence the name of the popular website Seeking Alpha.

Out performance can be gained via market timing strategy and/or superior stock selection strategy, to simplify matters.

For this article, I am only looking at market timing.

If we could really predict the market's moves, market timing would be great.

The problem is that there is evidence to show that market timers do not do well.

An annual study by DALBAR, a research firm, showed that the average investor in equity funds has averaged only 4.3% per year in returns over the most recent 20-year period in which the S&P500 averaged 11.8% per year – and DALBAR finds that most of this under-performance of the basic market index is due to attempts to time the market.

There are a host of other studies that show that market timing leads to returns that substantially lag the market.

Even if there were a few funds out of the thousands that have proven to market time successfully and outperform consistently over a 5 or ten-year period, would it be smart to give them your money?

Essentially, you have to bet on these funds' ability to maintain their track record or on the long-term evidence pointing to the low success rate of market timing.

There is a large body of research, which concludes that actively-managed funds that beat the market in some period are not likely to continue to out-perform over any extended period.

In 1975, William Sharpe published a seminal article on this topic: “Likely Gains from Market Timing”.

In this article Sharpe demonstrated statistically that in order to benefit from a market timing strategy you had to guess right 74% of the time. Hence it is possible, but very arduous indeed.

Alpha is a definition only; it may or may not exist. For people to get alpha, they need to be better at market timing and price timing.

Warren Buffett obviously does not believe in market timing or price timing. He sees them as businesses, and for the right price he will buy the business regardless of sentiment.

He may even suffer short-term weakness or short-term losses holding these businesses, but he does not market time or price time his purchases. To him, if the price is cheap relative to future value, then it's good enough.

If market timing and price timing works for only 5% (1 person in 20 is about right) of participants (or even just 1%), all studies would reveal that market timing and price timing does not work as the results are not substantiated – hence the random walk theory.

Suffice to say that even if the 5% or 1% do make it work (which is what I strongly believe), it's just that much harder.

When things are that much harder, many will opt for easier routes such as buy at good price and hold, or buy the business and forget the volatility.

I am not saying I can do this well. I am not saying anyone can do this well. I am suggesting that one can do market timing and price timing well provided they get two things right – the big picture and the catalysts.

People like Buffett and Lynch are big picture guys, but you still need to get the catalysts right for market timing to work properly.

For example, Buffett has been short on USD since 2000 but he only made money over the last two years and lost some in the first 3 years. As for Soros, he is trying to be both. When he shorted the British pound and made billions, he got both right.

But even Soros cannot get both right all the time.

Getting the big picture right is the easy part. Determining the catalyst(s) for a dramatic change or trend swing is a lot harder.

Truth is, there is no known classes on catalysts like what is significant, what is not, the cumulative effect of several catalysts, catalysts for differing economic environment, how sentiment relates to catalysts and so forth.

If you see a bubble forming in an asset, say property, you can fairly judge the probable steps ahead for the market in coming to terms with the bubble: you project that prices will rise, there will be over-exuberance, followed by resistance to bearish calls, rising rates to counter inflation, prices stubbornly refusing to come down, start of some foreclosures, some concerns among banks, some leveraged property companies failing, rising foreclosures, a crisis being discussed by the media, and so on...

These are the natural chain of events, which make up catalysts in bringing to fruition changes to trends.

I do think that if someone learns to follow cycles and chain of events closely, they will be able to better time the market.

Someone who calls the Shanghai index overvalued at 4,500 on the way up would be a good read but a poor strategist. The index hit 6,500 before moving down to 4,000 six months later.

The pro is correct but if he made any money, he probably lost on the upside and if he kept short all the way from 4,500, he would have lost even more on a net basis.

One should have stayed invested as bull runs tend to overshoot, but stay alert to trade out on warning signs.

The listing of Petrochina on Shanghai was a “high” – how to recognise that as a critical catalyst? Experience, predicting capital flows and most importantly, predicting or anticipating the behaviour of investors.

Here are some recent examples:

·Subprime mess – Big picture calls were loud by mid-2007 but markets were still resilient. There were plenty of catalysts, but deciphering which one will break the camel's back is the hard part.

Sometimes, few cumulative catalysts are needed before the water overflows. I regard the second plunge of Countrywide to be a major catalyst, which prompted Bank of America to average down dramatically.

The other major catalyst was the Citigroup's write down, not of the CDOs holdings but because of the significant provisions made for future “problems with consumer debt”.

Thanks to CNBC and Bloomberg news, there is an overload of information. To be able to stand back and pick the real catalysts is nirvana, for want of a better word.

The key is getting the big picture right first. Then assess the catalysts accurately, but it can be an arduous task. If we still cannot market time or price time, then at least we know why we are not good at it.

To do well in market timing is like climbing the Everest. There are those who will make it to the top (very few, that is). Most will die trying halfway. Some will give up after a few inclines. Others will opt for hills instead.

(The above article is written by S. Dali, an ex-analyst/fund manager and active blogger on Malaysia finance matters.)

Are you a believer in timing the market? Do give me your views.

Subprime - Light At The End of Tunnel?

Last Sunday, Bear Stearns was rescued from a major collapse by US Federal Reserve by providing a USD30billion finance deal to pave the way for a takeover by JP Morgan. Bear Stearns is no small feat, being the fifth largest investment banker in US! JP Morgan is buying Bear Stearns for US$2/share....what a steal!

Some interesting facts for Bear Stearns.....From only US$3.67 after the Oct 87 crash, Bear Stearns’s share price shot up to a peak of US$172 in Jan 07. Since then, the stock has corrected sharply and is now 83% off its Jan 07 peak!

In recent days, the Fed has focused efforts on a series of surprise moves to make funds available to banks and Wall Street firms, offering hundreds of billions of dollars in auctions and credit to thaw frozen credit markets.

Last week, Standard & Poor had also reported that an end is in-sight for sub-prime related writedowns at large financial institutions, providing a positive dose of relief for investors.

Goldman Sachs and Lehman Brothers, both major financial wall street companies, today reported better than expected financial results respectively....perhaps further providing some comfort that worst might already have happened.

On the other hand, US Federal Reserve is expected to undergo a largest rate cut in 26 years, probably by one percentage point, today.

Could these be the signs of worst of sub-prime could finally be over? More importantly, could we start to see a major turnaround in Wall Street's performance from hereon?

Personally, I am still less optimistic that it is going to end soon, but at the very least, there appears to be light at the end tunnel!

Should I Diversify My Investment?

Depending on which particular school of thought you belong to, the answer hinges on individual's perception on risks. Most people including savvy investors and financial planners claim you need to diversify to reduce your investment risk. If you don’t, they say, you could lose money. However, investment gurus like Warren Buffett (one of the richest billionaire on planet earth) said that when intelligent investors diversify, they WILL lose money. Therefore, if you can truly recognize a good investment, diversifying is not a good idea.

"We think diversification, as practiced generally, makes very little sense for anyone who knows what they’re doing. Diversification serves as protection against ignorance."
-Warren Buffett, as quoted by Sandman at Berkshire’s 1996 Annual Meeting

Peter Lynch, another investment guru, on the other hand, says that if you are afraid of losing money, then you obviously don’t know what you’re doing. And, if you don’t know what you’re doing– why are you investing in the first place?

"Buying what you know about is a very sophisticated strategy that many professionals have neglected to put into practice."
–Peter Lynch

By this same argument, Warren Buffett reasons that you should wait until you understand and analyze all of the information to make a potential investment. But when you do, you should jump in with both feet.

These sounded complete common sense to me, but however, does everyone has the same acute vision and analytical ability as well as these gurus are? Quite clearly, the answer is no. The probability of making mistakes or misjudgement of a particular asset's potential does even apply to many of the most savvy fund manager or investment gurus out there. While believing in own self does not always equate to correct judgement, this is the reason why we should all diversify in our investment portfolio in order to protect ourselves from the probability of making false judgement.

Putting all your eggs in one basket could potentially backfire, unless you absolutely know what you are doing. However, even so, mistakes, unforeseen or uncontrollable circumstances do happen!

On the other hand, i don't suggest anyone to overstretch the diversification too far until there is absolutely no weightage on any particular assets or investments. It may just shows that there is a genuine lack of confidence in what one is doing or simply, not done enough homework to be self-confident!

What's your view? Do you believe in diversification?

(Certain quotes of this article are extracted from an article posted in this link)

$200b Rescue Plan: Just-in-time, Or Too Late?

In a latest twist of event, US Federal Reserve announced a USD200billion rescue plan or liquidity injection into US credit market to alleviate the current US sub-prime mortgage crisis. The Fed said it was expanding a lending program and will accept a broader base of securities as collateral, including mortgage bonds whose value has declined as the housing bubble burst.

What a timely move and timely boost too, as Dow Jones were languishing around the critical support level and the lowest level for the past one and half year! Have Federal Reserve picked the best time of all and introduced one of the most effective strategy to help turning US ailing economy around? Ironically, with latest job data at an all-time low, one could not help but to think that recession is already in full swing. Time will tell but many seem to think that it is already too late as US is technically in recession.

As a result of the rescue plan, the Dow and Nasdaq rang up their biggest daily percentage gains since March 2003, with Dow going up by a massive 3.5% yesterday! Asian markets had responded positively to the news too, with modest gains from 1% to more than 2%. Hand on for a second, shouldn't we expect Asian markets to respond by a bigger margin? Perhaps even the rest of the world is not convinced of US latest story, as recent history suggests that we may still yet to see the worst....

Torture... slow death, i am afraid this is what the Yankee market is doing to the rest of the world! We may just have to sit it out and watch the play(s) unfold yet again!

Just-in-time or it's too late...time will tell.

What's your view on this? Do drop me a note.

Winds Of Change But It's Time For Execution!

Wow, what a day! KLCI dropped by almost 10% and even hit the circuit breaker and trading was halted for an hour! As if this was not bad enough, there was also a technical glitch with Bursa trading systems as many selling orders were not executed successfully! Expect more selling on Tuesday!

As the country of Malaysia is blowing winds of change, there are much uncertainties at both the political and economic perspective! Many questions are left to be answered, such as will there be a change of leadership at the top of the pinnacle and the rest of the coalition political parties? Will there be a change of business policies and review of major business contracts and development plans given that certain states are now ruled by the Opposition? Timely implementation of major projects may also be delayed due to further complications surrounding both camps. What about the opposition themselves? With their perceived lack of expertise in governing, will they be able to effectively govern the states, tackle corruption and work seamlessly with the Federal Government on policies and engagements? These uncertainties are certainly not helping the foreign and local investors, as the perceived uncertainties have led to a major liquidation of their portfolios in Malaysia, exacerbated by Monday's 10% drop.

Is it really all so bad or can we see light at the end of tunnel? For the short to medium term at least, things certainly look gloomy as all parties work all round to overcome the challenges and quash any major uncertainties. Whilst a stronger opposition does make it harder to a certain extent for the Government to get things done and approved in a timely manner, it is certainly good to inject a sense of check and balance, transparency and better governance. With that perhaps the Government may get their act together and improve their whatever deficiencies and ultimately serve both the people and business community better. Unlike before, whatever policies or proposals the Government intend to pass in resolution will meet stiffer scrutiny and reviews. Gone will be the days where matters can be easily abused, leading to corruption and inefficiencies. Also, this may also prompt the Government to reinvent or fine tune the model fo wealth distribution for all communities.

In the scenario where above improvements were met, it will certainly propel the country to the next level where justice, fairness, transparency and efficiencies rule. Needless to say, global investors' perception of Malaysia will also be upgraded, bringing more business opportunity and investments to the country.

While this wind of change may just be the beginning, it certainly offers better hope for the people of Malaysia and the country as a whole. The struggle may persist for now but could well be a preclude to a better future!

So don't be disheartened by short term market downturn, it's the future that matters!

Malaysia Election Review: Votes Of No Confidence

Malaysia's political landscape was dramatically transformed Sunday after the government slumped to its worst ever election results, losing its two-thirds majority and five states to a buoyant opposition. The coalition has effectively ruled Malaysia since independence in 1957. The coalition ended up with 62 percent of federal seats, down from 90 percent previously.

Indeed a clear message from fellow Malaysians in their quests for change and reformation. This result effectively will put a dent on the Government's future plans and policies, but worst of all, it could seriously affect the country's political stability as question marks being raised against the current leadership.

However, a stronger opposition's presence may not necessary be a bad thing, as there should now be much better check and balance than ever before!

From an investment perspective, any potential political uncertainty may not augur well for investors particularly for foreign investors. Thus, i expect some knee jerk reaction on the coming Monday's stock market opening.

However, fundamentally i do not foresee major changes as status quo should remain. Economically Malaysia is still in a relative strong position boosted by a strong domestic-driven market and major infrastructure projects coming from the 9th Malaysia Plan. The economy should be able to cushion off any downside from sluggish exports due to global economic slowdown led by a potential US recession and financial crisis. For the record, Malaysia's GDP grew at a strong 6.3% in 2007 and should maintain at around 6% in 2008.

Nevertheless, the risk to the above assumption is that projects slated to be implemented in states where opposition parties have taken over may face potential challenges or at the very least, reviewed.

What's your view on Malaysia after the general election? Any feedback is welcome.

How To Manage Investment Volatility

When the market is on a bull run, as it was in the earlier part of the year, or during the first half of 2007, investors tend to neglect risks. However recent events (triggered by US sub-prime and financial meltdown) demonstrated that investing in stock markets isn't for the faint of heart. A case in point is that for the past few months, wild swings of daily stock market indexes by few percentage points were common. How does one manage his or her portfolio in such volatility? For some, unloading all their stocks and keep all their CASH safely in the bank may sound the safest option. Others may switch part or entire portfolio to other safer instruments such as gold or commodities, or cash instruments.

While timing everything right seems impossible, there are better ways to manage one's portfolio. Essentially, getting it right at the start is important. One will worry less if one's portfolio is structured right to start off with, that is, maintain an asset allocation strategy based on one's personal risk profile at the very first place. With asset allocation, diversify one's portfolio is the key, in order to reduce over dependence of a specific asset class, that is.

Diversify
One such method is to consider various instruments that have low correlation to one another. For example, while directly investing in individual stocks has good direct exposure, consider investing in unit trusts or ETFs, where typically the funds will be invested in a basket of stocks instead of one individual stock. In principal, stocks tend to be a lot more volatile than equity unit trusts for the reason that funds tend to be more diversified because they are invested in multiple stocks.

Other low correlation asset classes include bonds, commodities (gold, metals) and real estate properties. Gold is a perfect case in point, where prices have escalated by around 50% from 2007 to-date due to sky rocketing crude oil prices and perception of safe-heaven characteristic.
Adopt Mid to Long Term Horizon The longer the time horizon is, the more volatility one can tolerate as one has more time to recover from short term volatility. Putting a mid to long term strategy in place will certainly allow an investor to take into consideration factors that will affect one's portfolio, such as market cycles, political stability and economic swings.

Stay Objective
While i agree that investing in general should be taken with a long term perspective, it is not a hard and fast rule as it is also important to stay objective and be alert to potential major changes in business or economic environment from both local and global perspective. For example, while investing in China equity at one point (prior to 2007) may be a great idea tapping into the explosive growth of Chinese companies, an investor should consider unloading some or all of the funds invested to else where when Chinese stocks were trading at lofty and unrealistic valuations. Another example is when subprime issues first surfaced, it is wise to find out from the brokers or agents immediately where their property trust funds were invested. It is wise to liquidate such investments when the stakes are high!

Invest Regularly
Invest regularly is also a good way to manage periodic market volatility. For many this could be in the form of monthly investment, directly from their monthly income or retirement fund savings. In essence one will continue to invest a particular sum of money regardless of whether the market rises or falls. This method is also commonly termed as Dollar Cost Averaging.

One may choose to invest more regularly during the bull market and less regularly during the bear market. However, again there is really no hard and fast rule, it all depends on each individual's risk profile and preference.