Saturday, 24 August 2013

Scary Financial Headlines, Don't Be Mislead!

I find it extremely disconcerting that our daily paper are spewing out troubling headlines such as the one shown below:

Obviously the title is a headline grabber, otherwise why would I click to read the contents. However the contents is rather far fetched from what I expected it to be. Instead of expecting a good solid case study backed with reliable figures on what might trigger a larger global crisis, I got a write-up of a public investment seminar by a certain person from an investment organization. Big disappointment there!

Secondly, after reading the article, I'm find myself rather disappointed that the element of fear, some inaccurate statistics, some presumptions and a tinge of exaggeration were used by the speaker in this seminar. I intend to take the opportunity to share my personal views and perhaps correct some inaccuracies stated in the article.

Point Number 1
Let's take a look at the introduction first:

Most of us should be aware by now that the economy of any country will go through cycles of ups and downs. This is the natural order of economics, what goes up must come down. When an economy gets out of control, a downturn runs its course to cool things off. Then comes the rebuilding and growth stage all over again. 

Now back to the news article, I totally agree that an impending financial crisis would happen somewhere in the near future. No doubt about it. What I disagree is the severity of the crisis which according to the speaker would be tremendous in proportion. A crisis without recovery is something that I can't accept. What facts and figures are the speaker referring too to come to this kind of prediction? 

He speaks of capital flights and volatile markets? We have gone through the worst of the Asian Financial Crisis in 1997/98 yet the effected countries such as Thailand, Indonesia and Malaysia were able to weather the storm and recover to achieve newer heights of economic growth. In fact the crisis itself created many millionaires and billionaires whom invested into stocks of company at below par prices. 

Global Financial Crisis causing rising inflation and social unrest? Once again, what are the facts to back this kind of prediction? The Euro Crisis which resulted in rising inflation and social unrest in Greece, Italy and France was rather serious but it did not trigger a collapse of the global financial institution. Hence for such an event to occur at a global scale, you need both the US and China economy to collapse which I do not think would be happen not when the United States hold the authority to manipulate cash flow of their economy while the Chinese have tremendous amount of foreign cash in their reserves.

Point Number 2
In terms of Malaysia, the speaker has an unfavorable outlook for Malaysia. Is this a hint for investors that Malaysia equities are a big no no?

Let's take a look at a snippet from the news article:

In terms of Government Debt, I do not deny that Malaysia has the highest figure in comparison with Indonesia, China and Thailand. Indeed measures need to be taken by the Government to reduce the debt level as per what I have written in many of my previous articles. While the debt issue is at a worrying level, it has not reach a crisis level that could trigger a financial meltdown for Malaysia. With the next election 4 years away, the ruling Government should be able to introduce taxes and subsidy cuts to reduce or at least maintain the debt level at a manageable level.

In terms of household debts, worrying as it is, Central Bank Governor, Tan Sri Dr Zeti Akhtar Aziz most recently introduced Financial Services Act to curb the problem of shadow banking. Tighter rules for loans issuance must be practiced both by shadow banks to prevent uncontrolled personal loan issuance. Click HERE to read more about shadow banking. In addition, Bank Negara Malaysia is also concentrating their effort into preventing property speculation and uncontrolled issuance of housing loan for 2nd and 3rd property. Find out more by clicking HERE.

For all the efforts by Tan Sri Dr Zeti, I believe that we would be able to overcome the issue of household debts in Malaysia gradually. If all else fails, what we will experience is an accelerated drop in property price as the bubble pops. Either way, I see it as a win-win situation for Malaysians whom can't afford to even purchase their first property!

Point Number 3
The speaker compares Malaysia with China, Indonesia and Thailand yet I hope he is aware that China is plague with a serious problem of shadow banking, Indonesia is facing inflation issues while Thailand is going through a recession now.

Point Number 4
In the news article, it is stated that half (50%) of our country's government bond is held by foreigners! I believe the situation is not as dire as what the speaker claim it to be. With the recent foreign outflow from our Government Bonds, the figure now stands at 46.8% as of June 2013 and should drop further as foreign investors return to the US equity market. However the situation of foreign outflow is as expected according to Tan Sri Dr. Zeti in this article published on the 22nd of August 2013:

It is common sense for foreign funds to flow in and eventually flow out again as the US economy improves. If a common person such as myself is able to foresee such an outcome, I am sure the Head of Bank Negara Malaysia (BNM) would have been more then prepared to face this situation. Key actions taken by BNM that would prevent an economic meltdown due to foreign funds outflow are:
  1. Sufficient foreign reserves. Our country's foreign reserve currently stands at USD137.9 billion. This is more then enough to buffer the exit of foreign funds from out bond market which currently only stands at RM228.9billion (approximately USD69billion).
  2. Low foreign debt. Our country's foreign debt is at an extreme low of RM16.453 million.

Our country is blessed to have a prudent yet brilliant lady as the Head of the National Bank!

Point Number 5

Speker states that Malaysian workforce is now less productive as compared to Thailand and Philippines. I can't believe that a point like this can be used as a point to indicate Malaysia is not a favorable investment destination. How do you know Malaysian as lesser productive? Are you measuing the hours put into work? Production figures? Let's have some numbers to back that up dear speaker. Nuff said!

Point Number 6
Speaker says that Malaysia imports more oil then selling it. Ever thought why are we doing this? What do you think is supporting our country's economy? Profit from of oil and gas sales of course! FYI, profit from oil and gas contributing more then 20% annually to our GDP! 

Known for producing better quality oil, Petronas is selling our oil at premium price to other countries while importing cheaper lower grade oil back to Malaysia. Some might question as to why can't Malaysians enjoy our own natural resources? This is one subject I wish not to debate or politicize via this post. Know for a fact that without the profit from oil and gas sales, our country would not be able to sustain the economy and provide us Malaysians with subsidies exceeding RM20 plus billion per year.

After reading the news article, I find that the seminar conducted had the following elements:
1. Fear Mongering
2. Discrepancy in figures
3. Unjust acquisition
4. Lack of understanding towards the economic situation of this country

Any investor with no actual figures in their hand or have minimal understanding of the economy and financial situation would have been overwhelmed by the seminar. Fear of investing in Malaysia and generally the stock market would have been created easily just from reading the article, not to mention attending it. 

I did a background check with the company that organized the seminar and discovered that one of the primary investment option offered by them is Gold Exchange Traded Fund (Gold ETF). In fact it is the biggest Hong Kong-domiciled gold ETF firm which held gold worth about USD100 million as of June 2013.

Now that explains the recommended diversification option given by the speaker as shown below:

Need I say more?

Cheers and Happy Investing

P/s : Whenever you read something, listen to a proposition or perhaps attend a seminar, take what's throw at you with a pinch of salt. Always do your homework and perform detailed checking on the points and figures before deciding to invest.

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