Malaysia's Budget 2008: Is it a Hype or Light At The End of Tunnel?

For the newly announced Malaysia's Budget 2008, is it a hype or light at the end of tunnel? Well, depends on who you speak to, the answer varies. The politicians, as usual, will sing the tune in lauding Government's effort, making statements like far-sightedness, one of the best, etc. So, we should just discount most if not all of their views since their answers were commonly biased. What about people who are in business? Well, my immediate reaction is that they should be happy given the fact that corporate tax rate will be further reduced by 1% come 2009. (Bear in mind tax rate for 2007 and 2008 have already been reduced by 1% each, that is, 27% and 26% respectively). This is definitely a step forward at the right direction, from corporate Malaysia's selling point perspective, but taking a step back, we know that Malaysia is still far behind more advanced East Asian countries such as Hong Kong and Singapore where their respective corporate tax rates are in the mid teens!

What about ordinary people (or rakyat) like you and me? Well, the common reaction seems to be less happy, given the fact that the highly speculated personal income tax rate has not been reduced (despite cut in corporate tax rate). Bear in mind that for most working class people, it is also common to find people paying at the higher thresholds of the income tax rate, given the way it is currently structured. So with rising cost of living (especially food, petrol, electricity, etc), most people will be disappointed with Government's latest decision to keep rates. However, on the flip side of the coin, i see that there are actually good news for people in general. Firstly, Malaysians now can purchase a new home by withdrawal from the EPF (Employee Provident Fund) on a monthly basis, which makes it now affordable for many to service their monthly mortgage installments. So, this is definitely a major plus point for the property sector in general, particularly the mid and lower segment of the property sector. This could well translate into increased property transactions and also better sales for the developers. In turn, it could also help resolve the property overhang (due to supply over demand) situation for the mid to low-end segment. Secondly, there is actually an indirect reduction in personal income tax, in the form of dividend income received from equity investments to be exempted from tax starting 2008. This is a good way to promote investments in high dividend yielding stocks, particularly those from good quality companies with sound management team.

Not to mention, the Government's effort on giving free education (up to secondary) and incentives for Research and Development initiatives are definitely a plus point, in improving education and creating the climate for Malaysian businesses to move up the value chain in order to become more competitive globally.

However, one of my biggest disappointment from this round is the lack of incentive given to promote REIT (Real Estate Investment Trust). As it stands currently, Malaysia's REIT sector is still trailing far behind countries like Hong Kong and Singapore. This is probably also reflected in its small size compared to these countries. The current tax regime relative to these countries are too high relative to these countries, rendering it less competitive in the region.

Last but not least, it is worthy to note that Malaysia has created tax incentives in attracting foreign talent into Malaysia in developing its Islamic financial markets and the country's goal to make Malaysia a Global Islamic financial hub. Given that Malaysia has lost the initiative to be the regional (conventional) financial hub, it certainly stands a better chance now to become a global Islamic financial hub but much more will need to be done. However, it is somewhat peculiar as some argued that such talents are born and brat in Malaysia, and as a matter of fact, Malaysia is the one losing her own talent to other countries who wish to develop their own Islamic markets on a daily basis! As such, such incentive may not serve the whole objective of retaining Malaysia's own talent.

In a nutshell, the latest Budget may not have served everyone's needs (and I think it will never ever be!) but there are certainly light at the end of tunnel.

Past Week's Economic Food For Thought

Some interesting extracts for the past one week which i thought could be of interest to some..

Quote of the week:

Federal Reserve Chairman Ben Bernanke, said the "Fed continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets. Further tightening of credit conditions, if sustained, would increase the risk that the current weakness in housing could be deeper or more prolonged than previously expected. The Federal Reserve stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of markets. He also made clear he won't rescue investors from bad decisions."

• US consumer spending rose by 0.4% in July, double the June increase.
• The US GDP was revised up to 4.0% annual rate of growth in 2Q07, from 3.4% estimated
  previously. (This is interesting, given the current subprime housing woes in US and its likely impact on economy! This is clearly a sign that US Government think the subprime issue will not pose a great danger to the overall economy...Time will tell if this holds true but i have my doubts)
  
• US construction spending unexpectedly fell in July by the most since January
• US mortgage application volume increased 1.3% in the past week.
• The US economy will slow sharply this year and fall behind growth rates in most of the
  world, according to forecasts in a U.N. report. Woes in the housing market will drag US
  GDP for 2007 to a modest 2% growth, compared with 3.3% last year. For the first time
  since 2001, both the European Union, at 2.8%, and Japan, 2.3%, are predicted to have
  higher GDP growth than the US. China, at 10.5%, and India, 8.5%, should experience
  economic growth rates similar to the last three years, the report said.
  
• China ordered banks to put aside more money as reserves for the seventh time this year to cool lending and investment after inflation accelerated to a 10-year high.

Back in Malaysia, the key event to watch will be the announcement of Budget 2008 this afternoon. It is widely speculated that there is a likelihood of personal income tax cut and more incentives for property sector for the benefit of general public (not just the high-end segment but across the board). This could also well be the last budget tabling before the calling of the next general election!

A Frantic Week!

What a frantic week! Last Friday i finally moved into my new home and took me almost a good whole day to move the stuff from old to new. I was quite thankful that my movers were very much helpful and they managed to move the things without damaging a single item. I also appreciate the fact that they did this on a public holiday so everything appeared to be calm and in order.

Sadly, after much deliberation and "pressure" from my wife, I had to give away my favourite 3 feet long fish tank, which i had kept for more than 5 years! Some relates fish tank to "feng shui", but really for me, watching fish "roaming" around in the fish tank and displaying its respective behaviour really gives me a great relaxing moment and a great way to relief stress. The reason we had to give it away was due to the fact that we could not find a suitable spot to house the tank.

So, it is time to unpack and get things sorted out in the right order! I could not believe it actually took me 2 days just to organize the kitchen alone! As at now, sadly, much of my study and bedrooms are still in a mess! It didn't help the fact that myself and my wife had to travel to Singapore to attend a special seminar presented by the many acclaimed world's number 1 success coach, Anthony Robbins. I have heard much good things about him and his world famous coaching workshop "Unleash the Power Within". Indeed, meeting him for the first time was truly a mind-blowing encounter! For those who would like to attend his workshop, i would strongly recommend it!

Moving into a new Home!

It's been almost 2 years my new piece of property has been ready for occupation and it has certainly taken me a while to decide what I wanna do with it! This is a four-bedroom apartment (better known as condominium in this part of the world) with decent club facilities and pool. Originally my plan was to renovate and move into this apartment in 2006 but the plan was thrown into disarray as out of a sudden (it happened last year), my mum whom was then staying with me, suddenly called it a day and decided to leave us and spend time with God instead! It was a freak accident and my mind (to renovate the place) was simply not there for several months thereafter. When I have finally got over it, my wife and I was contemplating whether to rent out the property or live in, given that I now have a smaller family of three. We felt that we needed to make a decision quickly as we needed to maintain the overheads of both properties. Finally we jointly decided that moving into a larger space is what we should do, given that our child will grow and probably needs more space to play. Perhaps, we may have a second child and of course, we get to enjoy it as well.

Well, we started shopping for new home furnishing and took us a while too to find the right people to help us to renovate our new home. I expected a fairly quick piece of renovation as we do not plan to do any structural amendment. Though simple it may seem, the renovation actually took more than 3 months to complete! The bizarre thing was, my contractor cum designer, actually told me previously that the renovation work would complete in 2 weeks!! I admit there was some variation order but in mind, these are not significant...so how he turned 2 weeks to 3 months is really beyond my wildest imagination!

Anyhow, the good thing is the renovation is finally over, and we could now witness the beauty of a new home. However, before we could pack our bags and move into our new home, we need to pack up from our old home and this has turned out to be much tougher than i thought! Never could I imagine the number of things that were hidden under our "radar", swept "under the carpet", hidden underneath our bed or kept inside untouched boxes! No doubt there are lots of "rubbish" which I should get rid of, but on the other hand, there are also hidden "treasures" which I told my wife that we could perhaps turn them into cash by auctioning them in eBay! I told my wife that this will be her little internet project to embark on but look quite puzzled on how to do it... I told her that do not worry too much as I have a few buddies who are learning the trade of selling in eBay and I can get them to show us how. Besides the saleable items, we decided that there are items such as clothings that are in good condition should be given away as charity. Our way to express our small contribution to the society....

So, finally, we have picked 31st August to be the day we move over to the new home. This day also happens to be my country's 50th year of independence (National Day)! So, perhaps I should sing national anthem at my new home to jointly celebrate the occasion!

In the meantime, my "packing" order is still undone.....so I believe I really need to speed up in order to catch the "moving truck"(my appointed Mover who will transport all my stuff from the old home to new!). Oh by the way, it was my Mover who picked this date, so it wasn't me who forced him to work on a public holiday!

My next key task is to refurbish my old home so that it could turn into a rental property. I shall talk more about this in my next post.

How Does One Value A Stock Market Index?

Stock market indices are calculated from the quotes of the stocks of which they are composed. It is therefore a sort of average. If an index rose 2%, then it just means the average share price rose by 2%. The number of stocks included and the exact way the calculation is done, is different from one index to another. For example, the Dow Jones Industrial Average is composed of 30 stocks, the 30 biggest companies in the US. The S&P 500 contains (you guessed it) 500 stocks, weighted by their size, and is therefore more representative for the economy as a whole. Kuala Lumpur Composite Index (KLCI), on the other hand, is composed of 100 top companies stocks. KLCI is a market value weighted indice, where price is weighted relative to the number of shares, rather than their total value.

So how do one determine how a particular index should be valued? Let's take a closer look at KLCI for example. It is now trading at about around 1,300. So is it cheap or expensive? The answer, however, can be very subjective, depending on the data compiled by different investment analysts. In principal, one should look at the forward one-year projected corporate earnings (eg., 2008) for a start. Compare that against the projected fair value of the component stocks, and one will get the Projected Price relative to earnings per share (PE) Ratio. The sum of all the component stocks' PE ratio will become a major factor to the would-be value of the stock index. So if one analyst's view of the forward PE as encouraging, he or she may place KLCI at say 1400, as the fair value by the end of the year. Get the point?

However, there is a major twist here! The key complication here is everyone is entitled to a different opinion. Some may be bullish over a particular stock's future earnings, another may be bearish. So the end result can be dramatically different! For example, a particular analyst may be recommending a buy on our low cost budget carrier, Air Asia but another analyst may recommend a sell (which is true right now, depending on one's ability to buy into Air Asia's growth story versus the high gearing which can be a real risk in view of the company's aggressive plan to expand their planes!) So at the end, I would say, the final decision belongs to the investor's self judgment as to who to believe, based on his or her instinct and knowledge of the matter and economy!

Someone asked me this question....given KLCI was trading at around 1300 in 1993, surely Malaysia's index is considered expensive now given that it is now trading at close to that number. The answer lies in how well companies perform and their projected earnings. At the end of the day, fundamentals and future prospects hold the key to any market rises.

Back to the question, is KLCI index cheap or expensive? Let's look at this table:








(Source: CIMB Investment Bank Research)

At 1300, KLCI is trading at around 14x PE. So judge for yourself whether it is cheap or expensive. It is interesting to see that if we go by the 25-year average of 20x PE, KLCI should be trading at 1,880!!