A Case of Reality Check

2009 was a stellar year for global stocks recovery. As I had written before, it was more hope than factual when global funds decided to take on an optimistic route. 2010 is expected to be a lot tougher, in the sense that what was expected last year must bear fruit this year, in order to sustain the bullish views across global economy and investments.

Last year (until the beginning of this year) we saw massive inflows of funds into emerging markets particularly like China, frenzily mopping up undervalued equity stocks and real estate properties. Property prices in Shanghai, for example, has even surpassed the previous highs made before the 2007 financial crisis! Things were beginning to look more bubblish and speculative than solid fundamental!

Problems began to emerge towards the end of 2009, in places like Dubai where they were not able to service their massive debts, to the point they need to be rescued by Abu Dhabi's sovereign funds.

Next in line comes some of the European countries commonly known as the PIIGS (being Portugal, Italy, Ireland, Greece and Spain) who appear increasingly unable to service their respective sovereign debts.

The key question in everyone's mind is that will this snowball into a global issue? Thus turning it into a double dip recession, as what some economists have predicted?

Worries about Europe caused the Euro to hit an eight-month low against the US dollar.

The perception of US Dollar may even turn to become a safe haven! Some analysts are also predicting a bullish rally on US Dollar this year against world major currencies!

China's Financial Market: Positive Reforms

China's latest decision in introducing derivative stock-index futures, short-selling and margin financing in equities are additional positive reforms designed to bring its markets in-line with other major global stockmarkets. Could this be also a further sign that China's financial markets are growing in maturity?

Personally, this is definitely setting the path to the right direction as China continues its effort to liberalize its markets, in order to become more competitive. However, in the short term, it may come at a cost to local Chinese investors as they require time to familiarize themselves with more sophisticated instruments. The degree of learning curve will definitely affect the outcome and return on investments too. For instance, margin financing may sound attractive to many people, in the form of easy availability of funds but if it's not managed properly and effectively, investors may find themselves landing in a bigger financial hole than they could ever imagine.

See related post "Is Margin Trading Right For You?"

Nevertheless, it is widely expected that the above reforms should help shrink the valuation gap that has kept yuan-denominated shares (A-shares) at a premium to similar shares listed in Hong Kong (H-shares) and Singapore (S-chips). The valuation gap between Hong Kong and China, for instance, could trade more than 50% such as what happened in August 2009.
The valuation gap between the two is often attributed to China's capital-account restrictions, which make it hard for average investors to buy shares in foreign markets.

With the availability of shorting mechanism, it will then be possible for qualified Foreign Institutional Investors to short the more expensive A-Share and buy cheaper H-share companies.

Short-selling refers to selling a particular stock first with the aim of buying back at a lower price later, for a profit.

HSBC have estimated the reforms will boost the amount of cash circulated on China's yuan-denominated stock markets by 200 billion yuan (US$29 billion) to 500 billion yuan during the next 12 to 24 months.

It will also be interesting to see if the H-shares will outperform Chinese stocks in the near future, once the above instruments were implemented.

With some believing that the introduction of index futures will help moderate share-price volatility, personally I have doubts that this will happen. Volatility will stay as long as there are abundance of liquidity in the market.

Nevertheless, one could certainly use index futures to hedge against stock holding risk, by shorting index future while being long on stocks.

No Escape From Credit Card Service Tax

For all Malaysians who carry credit cards, looks like your faint hope of the Government withdrawing their decision to charge service tax is in wane! In the light of Government's push for "prudent spending", better act smart now!

If you try to contact your banks these few days, chances are the phone lines could be jammed with traffic!

However, the good news is that you are unlikely to be charged the service tax immediately, as the fee is only payable when new credit card is issued, or upon the anniversary date of the credit card issuance.

For example, if a credit card is issued to a new cardholder on Jan 15, 2010 with a validity period of a year expiring on Jan 14, 2015, a service tax of RM50 would be chargeable on Jan 15, 2010. On the anniversary date of the following years (i.e., Jan 15 for year 2011, 2012, 2013 and 2014), the same amount of tax will be charged again on the respective dates.

For existing cardholders, for cards issued on Sept 18, 2008 with a validity period of five years and expiring on Sept 17, 2013, service tax would be charged on its anniversary date on Sept 18, 2010, followed by Sept 18 2011 and Sept 18, 2012. However no tax will be levied for 2009 given that the policy will only be effective Jan 1, 2010.

Credit cardholders can expect to see the payable amount of service tax in their statement separately.

In the event a credit card is upgraded (such as in the case of a Classic card to a Gold card) or downgraded (such as in the case of a Gold card to a Classic card) or converted (such as in the case of an Islamic card to a conventional card) or reinstated (such as in the case of a cancelled card), the service tax will be charged on the new cards issued unless the anniversary dates of the previous and the new cards are the same,

For supplementary card holder, the amount of tax levied is RM25 per card.

The above tax applies to both credit cards or charge cards, but not on cash cards such as debit cards, petrol cards, closed community charge cards, loyalty cards and e-money like “Touch n’ Go”.

Another piece of good news is that most banks have agreed to allow card holders to pay the service tax via reward point redemption. The estimated point for redemption is about 10,000 bonus point for principal card and 5,000 point for supplementary card. However, the points could vary from bank to bank.

Related Post:- To Cut or Not To Cut?

Merry Christmas & Happy New Year

I would like to take this opportunity to wish all my friends a MERRY CHRISTMAS and Happy New Year! May the good times and treasures of the present become the golden memories of tomorrow. Wish you lots of love, joy and happiness.

Happy investing and many good returns ahead in 2010!

China Stocks To Rally In 2010?

Source of Article: Bloomberg

Chinese shares may rise as much as 35% next year as the yuan strengthens and earnings growth accelerates, according to Greenwoods Asset Management, manager of this year’s best-performing Chinese long-short equity fund.

According to Greenwood's Hong Kong office head Joseph Zeng, the gains by A shares denominated in yuan in Shanghai and Shenzhen will probably exceed a forecast increase of as much as 30% for mainland companies’ H shares traded in Hong Kong. Zeng's prediction is that China shares will extend gains as they have yet to enter a speculative “bubble”, and now trade at about 24 times estimated earnings, below the 10-year average of 35 times. In addition, China will probably yield to pressure from trading partners by allowing the yuan to appreciate by between 4% and 6% by end-2010, easing imbalances that worsened the global economic crisis.

The Shanghai Composite Index has jumped more than 8-% this year, as the government implemented a four trillion yuan stimulus package and allowed banks to lend beyond targets to support an expansionary monetary policy.

However, the US$1.3 trillion credit boom and a revival in the property market have triggered warnings about possible asset bubbles by officials and investors. Zeng on the other hand believes that overall property market isn’t in bubble territory yet either, because the “big gains” in prices were mainly confined to major cities.

According to Zeng, Greenwoods’ US$174 million Golden China Fund has 30% of its portfolio in A shares. The fund favours companies whose A shares are trading at lower valuations than their H shares. It also likes companies with “compelling valuations” in industries that are under-represented in Hong Kong, including Hundsun Electronics Co, which develops software for financial companies.

The Golden China Fund, which invests in A shares, H shares and American depositary receipts of Chinese companies, rose 137% year to date as of Oct 31, the best return among Chinese long-short equity funds, according to data from Bloomberg and the company. It also has the highest total return over one year, three years and five years among 37 peers tracked by Bloomberg.