Thursday, June 30, 2011

Record-breaking RM6bil sukuk sold

Malaysia successfully concluded the sale in two tranches totalling US$2bil (RM6.06bil) of sukuk wakala in the early hours of Wednesday in deals which saw a surprisingly high subscription rate given the uncertainties in the global credit markets and the gloomier global economic outlook.

The tranches a five-year US$1.2bil tranche and a 10-year US$800mil tranche were nearly five times oversubscribed, attracting subscriptions of well over US$9bil (RM27.27bil).

Sukuk wakala are Islamic financial instruments based on an underlying wakala structure in which the debt is issued by a special purpose vehicle entitling holders to a return in proportion to their investment.



The oversubscription rate not only signalled that demand for sukuk may be returning in the aftermath of the Arab spring demonstrations and global financial crisis, but also demonstrated investor confidence in Malaysian credit.

Analysts pointed out that the yield for the 10-year tranche was a new reference point for longer-term sovereign and corporate issuances.

The five-year tranche has a coupon rate of 2.991% and the 10-year tranche of 4.646%. A person with knowledge of the sale told StarBiz the sukuk were sold at 15 basis points lower than the earlier guidance due to the strong interest from investors.

According to Bloomberg, the five-year tranche yielded 145 basis points more than US Treasuries while the 10-year tranche yielded 165 basis points more.

“This is the lowest yield ever in the entire history of Malaysia's issuance in the US dollar market and by global standards, the oversubscription rate is considered high due to the total size of the issuance,” he said.

This compared favourably to Malaysia's issuance of a US$1.25bil sukuk ijara in May 2010 with a rate of 3.928%.

“The yield for the 10-year tranche will now become the reference point for later issuances either of sovereign or corporate debt originating from Malaysia or by other issuers largely because of the size of the tranche and the rarity of 10-year sukuk,” he said, adding that this was also the first sovereign sukuk wakala ever to be issued.

He said the take-up rate for the sukuk issuance could also be due to the scarcity of the country's US dollar-denominated debt, which stood at US$4bil (both sukuk and conventional bonds) and this would become even smaller next month when US$1.75bil (RM5.3bil) worth of bonds matured.

Hong Kong-based Societe Generale SA fixed income strategist Chong Wee Khoon said the sukuk issuance could be for the refinancing of the upcoming redemption of the bonds with a coupon rate of 7.5% next month.

“The 10-year tranche is likely to be used as a benchmark for other corporate sukuk pricing although the bulk of the sukuk issuance is at the shorter end of the curve,” he said.

Meanwhile, Hong Leong Asset Management Bhd executive director and chief executive officer Geoffrey Ng said in an email reply that investor interest in longer-dated sukuk generally meant there was strong demand for returns from US dollar-denominated issuances.

“The fact that the 10-year sukuk attracted a large allocation to Asian, US and European names mean that US dollar-based investors feel a yield return of 4.646% is generous given where interest (profit) rates are currently, especially the 10-year US Treasuries which now trades at 3.04%,” he said.

Ng said the oversubcription rate meant that general demand for syariah-compliant debt was far greater than supply and generated a scarcity premium.

“From an overall credit market perspective, the oversubscription rate tells us that investors are still confident of Malaysian credit,” he said.

However, due to the uncertainties in the United States and slower global growth, Ng said investors would likely remain invested in other government and high-grade corporate debt for diversification but demand an increase in overall yields.

“Hence, we expect credit spreads over US Treasuries to widen if economic growth expectations slow further,” he said.

A Finance Ministry statement said the sukuk was distributed to over 320 investors with Middle East investors taking up 29%, Malaysian investors taking up 27% while European investors took up 14% and US investors took up 8%.

The joint bookrunners and joint lead managers for the deal were CIMB, Citi, HSBC and Maybank.

The sukuk was assigned an A- long-term foreign currency preliminary issue rating by Standard & Poor's Ratings Services, while Moody's Investors Service gave the sukuk a provisional foreign currency rating of (P) A3.(The Star Online)

Saturday, June 25, 2011

Weekly Highlights on Money Market

SHORT- TERM interbank rates are expected to remain steady next week with Bank Negara Malaysia (BNM) continuing to mop up excess funds.

During the week just ended, the central bank intervened on a daily basis flush out excess funds by conducting conventional, repo, Al-Wadiah and Commodity Murabahah Programme tenders.

On Friday, total liquidity surplus in conventional operations stood at RM20.29 billion while in the Islamic funds, the surplus was RM8.69 billion. Following this, BNM issued a late conventional tender for RM20.3 billion and a RM8 billion Al-Wadiah tender, both for three days.

The three-month Kuala Lumpur Interbank Offered Rate was at 3.29 percent. - Bernama

Weekly Highlights on Currency

The ringgit is expected to see rangebound trading next week amid market cautiousness on the global economy outlook.

A dealer said the local unit could be moving around 3.02-3.05 levels per one US dollar.

In a research note, MIDF Research said it expected the riggit to appreciate against US dollar in second half of 2011, benefiting from Asia's healthy economic outlook excluding Japan.

"We reiterate our ringgit/US dollar average forecast of 2.97 for this year while 2.95 for next year," it said.

This week, the market saw support for the US dollar as a safe-haven currency on Thursday and Friday amid worries about bearish US economic outlook, Greece's debt crisis and weak Chinese data.

On a Friday-to-Friday basis, the ringgit ended lower against the US dollar at 3.0390/0420 compared with 3.0400/0450 previously.- BERNAMA

Saturday, June 18, 2011

Dollar Traders Balance Liquidity Concerns against Fed Rate Decision

  • Dollar Traders Balance Liquidity Concerns against Fed Rate Decision
  • Euro Struggle for Relief with Greece, Moody’s Raises a Red Flag on Italy
  • British Pound at the Mercy of Stronger Cross-Pair Trends
  • Japanese Yen: Performance Based on Direction and Source of Risk Trends
  • New Zealand Dollar Faces another Update on Earthquake Influence
  • Canadian Dollar Holding Strong as Rate Expectations, US Oil Drop
  • Gold Advances after IMF Warns of Greek Contagion Risk, Lowers US Growth Outlook                                                              
Dollar Traders Balance Liquidity Concerns against Fed Rate Decision
The greenback ended this past week on a notably-weak footing. Though it would be a tidy explanation to simply assign responsibility for the biggest drop in two weeks on the weaker-than-expected reading from the University of Michigan’s consumer sentiment survey, that would ignore the true fundamental currents behind the market. The true culprit behind the stumble is the same that sparked the rally earlier in the week: the global implications of Greece’s financial ‘situation’. When news of the EU member’s political troubles hit the wires Wednesdays, the financial ripples spread quickly as investors scrambled to hedge their exposure to risky European exposure and subsequently taxed the market’s liquidity for short-term funding. This panicked demand for access to capital is the same leverage that pushed the dollar to its heights during the 2008, global financial crisis. Yet, when the need for safety flags, so too does the appetite for the greenback. And, despite the pullback after mid-day through the New York session, equities put in for a positive close for the week; while the euro climbed against most of its counterparts. Through this rebalancing effort, the Dow Jones FXCM Dollar Index found dropped 0.7 percent to close at 9,598.

 
Heading into the new trading week, the same themes will likely remain the dollar’s primary source of direction and momentum. For guidance, the traditional S&P 500 as our benchmark risk appetite will still be the favored barometer. However, to derive a true sense of strength for the dollar; we’ll need to establish the source and quality of sentiment. Improvements in risk appetite will generally have the same result for the currency – losses. It is the potential in failing sentiment that requires careful contemplation. Since liquidity is the dollar’s true allure; we need to keep an eye on the very stability of the financial and funding markets. Measures of volatility (which work well to gauge panic as well as the rates for insurance) and benchmarks for overnight funding are the best indications of dollar strength.
This underlying, fundamental concern aside the economic docket carries a significant round of growth-related indicators (durable goods orders, new and existing home sales); the only event to carry a substantial weigh for the FX market is the FOMC rate decision. Last month, the Fed held rates unchanged (as was fully expected) and Chairman Bernanke delivered his first press conference. These meetings were intended to be quarterly updates; so we shouldn’t expect anything more than the statement. On the other hand, this is the last meeting before QE2 is scheduled to expire. Traders, investors, economists and policymakers will all watching closely to see if there is any mention of the central bank’s plans to increase or work down its extraordinary stimulus going forward. Very early plans for a withdrawal could very well be discussed.  (Forex@DailyFX)

Wednesday, June 15, 2011

Pound Slides Versus Dollar as Jobless Claims Surge and Wage Growth Slows

The pound slumped versus the dollar after a report showed U.K. jobless claims surged more than economists predicted in May and wage growth slowed, damaging the case for the Bank of England to raise interest rates.

terling slid 0.5 percent to $1.6296 as of 10:08 a.m. in London. The pound strengthened 0.3 percent to 87.94 pence per euro, after appreciating as much as 0.5 percent. Wage growth excluding bonuses slowed to 2 percent in the three months through April, the weakest since the quarter through August.

The pound had been supported by a separate report that showed U.K. consumer confidence jumped the most in 5 1/2 years in May. An index of sentiment compiled by the Nationwide Building Society gained 11 points from April to 55, the highest in five months.

Copper may rise for a second day in London as an unexpected gain in European industrial production and lower inventories of the metal in China signal steady demand.

Copper for three-month delivery rose $6, or 0.1 percent, to $9,175 a metric ton by 11:58 a.m. on the London Metal Exchange. Prices advanced as much as 0.5 percent after gaining the most since May 18 yesterday. September-delivery copper was little changed at $4.175 a pound on the Comex in New York.

Inflation in China

Copper gained yesterday as a report showed industrial production in China advanced 13.3 percent from a year earlier in May, little changed from the prior month. Still, the Chinese central bank yesterday increased lenders’ reserve requirements to a record after growth in consumer prices sped up to the fastest pace in almost three years.
“Monetary tightening remains a concern,” Natixis’ Brown said. “The high levels of inflation remain a concern.”
Chinese inflation climbed to 5.5 percent in May, figures showed yesterday. It has topped the government’s 4 percent target each month this year. Inflation may reach 6 percent this month, according to banks from Societe Generale SA to UBS AG, prompting speculation interest rates might rise further after four increases since September.
Borrowing costs may climb “in weeks, if not days,” according to an unsigned editorial in the China Daily today. (source: bloomberg)

Gold Declines as Stronger Dollar Curbs Demand for Alternative Investment

Gold declined in London as a stronger dollar curbed demand for the precious metal as an alternative investment.
The dollar gained against six major currencies as European Union officials failed to agree on a second Greek rescue plan. Bullion typically moves counter to the greenback. China yesterday ordered lenders to set aside more cash as reserves after inflation accelerated to the fastest pace in almost three years.
“Precious metals have come under pressure as a result of the firmer dollar,” James Moore, an analyst at TheBullionDesk.com in London, said today in a report. Still, “rising inflation indicators, ongoing debt issues and the increasing risk of default by Greece will likely limit downside pressure, with investors to view corrections as buying opportunities.”
Immediate-delivery gold fell $5.03, or 0.3 percent, to $1,518.75 an ounce by 11:22 a.m. in London. Gold for August delivery was down 0.3 percent at $1,519.60 an ounce on the Comex in New York.
Bullion rose to $1,517.75 an ounce in the morning “fixing” in London, used by some mining companies to sell output, from $1,516 at yesterday’s afternoon fixing.
EU finance ministers yesterday agreed to convene again on June 19 after they failed to reconcile a German-led push for bondholders to share part of the cost of a new Greek aid plan. European Central Bank warnings were backed by France that the move might constitute the region’s first sovereign default.

Rescue for Greece

German Chancellor Angela Merkel and French President Nicolas Sarkozy will meet on June 17 in Berlin, with pressure mounting for the leaders to resolve their differences over a rescue for Greece, which was downgraded this week to the world’s lowest credit rating by Standard & Poor’s.
Gold is up 6.9 percent in 2011 after climbing the past 10 years, the longest run of gains in at least nine decades. Europe’s debt crisis helped bullion reach a record $1,577.57 on May 2. Bullion may extend its rally as demand surges from emerging markets including China and India, according to the producer-funded World Gold Council.
“There’s a tidal wave of gold demand coming,” Jason Toussaint, the council’s managing director of U.S. and investment, said yesterday at the Bloomberg Link Money Managers Conference in Boston. “A key is the long-term fundamental change in emerging markets. The biggest markets of growth are China and India.”

Silver Falls

Silver for immediate delivery fell 0.8 percent to $35.12 an ounce in London. The metal reached a record $49.79 on April 25. Silver held in exchange-traded products dropped 197.1 metric tons to 13,605.1 tons yesterday, the lowest level since September, data compiled by Bloomberg show.
“A 10 percent downside correction now looks more likely than a 10 percent rebound,” Edel Tully, a London-based analyst at UBS AG, said in a report. “While we think another shot at $50 is very possible later this year, for now the risk-reward doesn’t seem worth it.”
Palladium declined 0.7 percent to $788.50 an ounce. Platinum was down 0.4 percent at $1,785.40 an ounce.(source: bloomberg)

Tuesday, June 14, 2011

Web 2.0 = Tech Bubble 2.0?


KEY POINTS

  • LinkedIn's first day of trading witnessed its stock surge by 109% to an intraday high of USD 122.69
  • IPOs of Web 2.0 companies are in the pipelines, with Zynga and Facebook reportedly listing this year and next year respectively
  • Exorbitant P/E ratio of LinkedIn tied to a dearth of supply of Web 2.0 companies
  • The fall in the share price of Renren to below IPO levels provide a grim reminder of what are essentially still start-up companies
  • Tech giants yet to see a rerating in their valuations
  • The tech giants seen to view social media and social networks as part of a larger global strategy rather than a core business
  • Increasing e-commerce, demand for cloud computing and growing capital expenditures to be the earnings drivers of the tech bellwethers

The recent initial public offering (IPO) of LinkedIn (a social-networking site for professionals) and its subsequent stock price movement, has led to warnings of a new tech bubble circa the Dot.Com period of the late 1990s. The stock of LinkedIn surged 109% by the end of its first day of trading, almost tripling in price from its launch price of USD 45 to an intraday high of USD 122.69 as investors clamoured for exposure to Web 2.0 companies.

THE IPO NETWORK EFFECT
The recent spate of IPOs by tech companies have comprised mainly of social media & networking companies from the world over. The Chinese companies led by Renren (a social-networking similar to Facebook) and Sina (similar to Twitter) , Russian companies led by Yandex (a Russian search engine dubbed the "Google of Russia") and the recent IPO of LinkedIn have all drawn investors attention back to the technology sector with a focus on social media companies. Taking a closer look at Renren, the company had surged 28.64% on its first day of trading, only for it to have given up its gains and trade below its IPO price as investors got over the initial euphoria and earnings growth concerns resurfaced.

With such high demand by investors wanting to buy into the growth of social-networking and social media, supply although tight for now, has a few offerings in the pipeline. Companies believed to be on-track for listing soon in 2011 include the likes of Zynga (a gaming company specialising in mobile games reportedly planning a listing which would make it the second largest gaming company by market capitalisation) and Pandora (a music streaming site) while the darling of social networks, Facebook, is expected to list only in 2012 or later.
With huge amounts expected to be raised by many of these start-ups, worries have resurfaced that markets have gone into a frenetic frenzy, throwing away the notion of valuations and are focusing purely on the growth story as told by these start-ups.

Peeling back the curtain, it is clear that the current tech/social media and networking companies are different from the internet start-ups of 1999. Presently, markets have attached some valuation measures to the current companies and not just on metrics such as "page time, screen time", paying attention to the actual business model and revenues behind the idea and not gazing only with longing eyes at the growth story painted. For example, Zynga reportedly earned USD 850million worth of revenue in 2010.


IRRATIONAL EXUBERANCE & VIRTUAL VALUATIONS
The newly minted companies have seen their stock prices sky rocket past the stars. With LinkedIn surging by 96.27% to USD 88.32 (as of 27 May 2011), it seems like IPOs of social media and networking sites are the modern day gold rush. Like everything else, all good things must come to an end. The fall in share price of Renren to levels below its IPO price presents a stark reminder to investors of what are essentially still start-up companies, with growth potential but with many potential pitfalls as well.

Linking it back to LinkedIn, the skyrocketing of its stock price saw its P/E follow suit. With a trailing 12 month Earnings Per share of only USD 0.070, the trailing 12 month P/E of the company as of 27 May 2011 was 1261.71x. The exorbitant P/E ratio of LinkedIn is based on a dearth of supply of web 2.0 IPOs as investors chase the story that is all the rage today.

If one were to bring down LinkedIn’s P/E to that of the MSCI AC World Information Technology Index’s estimated P/E of 13.0 (as of 27 May 2011), it would require LinkedIn’s earnings to grow approximately 97 times its current value, a mind boggling figure by all accounts. Assuming one gives LinkedIn a 5 year period to grow its earnings such that its P/E ratio is that of the MSCI AC World Information Technology Index, the company would need to grow at a compounded annual growth rate of 149.69%! Given the unlikelihood and unsustainable nature of such phenomenal growth, it might seem fair to say that the implied earnings growth given the P/E is too aggressive. (source:fundsupermart.com.my)

Thursday, June 9, 2011

Malaysia at the Top for funds invest


The top 5 funds invest into Malaysian equities.

    Name of  fund                                            Return %(yr-to-date)        

- Kenanga Growth Fund                                11.4                                      
- Kenanga Syariah Growth Fund                  10.2                                   
- Amislamic Growth                                         6.1                                      
- Affinselect Growth Fund                              4.3                                        
- Prudential Dana Al-llham                             6.5                                        



In May, the FBM KLCI gained 1.5% (in RM terms). However, the top 5 funds flew way past the benchmark index and returned at least 2.7% during the month. A quick look at the top holdings of these funds did not yield any particular winning stocks that are common to all these funds, save for Axiata Group Berhad but the stock only rose 2.0% during the month (top 5 funds' allocation in this stock ranged from 3.4% to 7.1% of total NAV based on May 2011 factsheets). Once again, the stock-picking skills of the respective fund managers came under the spotlight.

The Consumer Price Index (CPI) in April 2011 accelerated to 3.2% year-on-year, the fastest pace in the past two years. There are also some signs that domestic demand could exert upward pressure on prices in 2H 2011, giving rise to expectations for further hikes in the Overnight Policy Rate (OPR) to 3.5% by the end of the year. To mop up the built-up global liquidity in the financial system, BNM also raised the Statutory Reserve Requirement (SRR) ratio from 2% to 3% effective from 16 May 2011.

On the currency exchange front, the RM strengthened against the euro by 1.4%, while at the same time it weakened against most other major currencies, including the Indonesian rupiah, yuan and US dollar by 1.9%, 1.9% and 1.7% respectively during the month. Since the start of 2011, the RM had risen against the US dollar 1.7% and weakened against the euro and yuan by 5.6%, and 0.2% respectively (as of 31 May 2011). (fundsupermart.com.my)