Crude Trades Near Two-Day Low on U.S. Demand Outlook; Price Forecasts Cut

Oil traded near a two-day low in New York as investors looked beyond a report showing a weekly decline in U.S. stockpiles and bet that faltering economic growth in the U.S. will temper demand for crude.

Futures fluctuated before a speech tomorrow by Federal Reserve Chairman Ben S. Bernanke, who is scheduled to outline what steps the central bank will take to stimulate the world’s largest economy. Standard Chartered Plc lowered its third- quarter oil price forecasts before a report that may show U.S. growth slowed in the second quarter. Crude supplies unexpectedly fell last week, U.S. government data showed yesterday.

“Everyone’s sitting back and waiting to see what Bernanke has to say,” said Jonathan Barratt, a managing director of Commodity Broking Services Pty in Sydney, who predicts crude will average $100 a barrel this year. “A 2 million drop in crude stockpiles is neither here nor there.”

Crude for October delivery was at $85.12 a barrel, down 4 cents, in electronic trading on the New York Mercantile Exchange at 11:36 a.m. Singapore time. Yesterday, the contract dropped 28 cents to $85.16, the lowest since Aug. 22. Prices are 17 percent higher the past year.

Brent oil for October settlement was at $110.17 a barrel, up 2 cents, on the London-based ICE Futures Europe exchange. The European benchmark contract was at a premium of $25.06 to U.S. futures, down from a record $26.21 on Aug. 19.

Crude Stockpiles

U.S. crude inventories dropped 2.2 million barrels to 351.8 million last week, the Energy Department report showed. Supplies were forecast to increase 1.75 million barrels, according to the Bloomberg News survey.

Gasoline inventories climbed 1.36 million barrels to 211.4 million, as imports increased and refineries raised output, according to the report.

Standard Chartered lowered its third-quarter price forecasts for New York and London-traded crude on “weaker-than- expected” demand in the U.S. and speculation output disruptions in the North Sea and West Africa will end.

The bank cut its Brent forecast to $112 a barrel from $115, Helen Henton, a London-based analyst at the bank, said in a report dated yesterday. New York’s West Texas Intermediate futures may average $90, compared with an earlier estimate of $98, according to the report.


U.S. Growth
Commerce Department data tomorrow will show U.S. gross domestic product grew at a 1.1 percent annual pace in the second quarter, down from the 1.3 percent that the government estimated last month, according a Bloomberg News survey of economists. Bernanke will give a speech to central bankers tomorrow at a meeting in Jackson Hole, Wyoming.

Hurricane Irene remained a Category 3 storm in the Atlantic and is forecast to approach North Carolina this weekend. It packed maximum winds of 120 miles (193 kilometers) per hour and may be upgraded today to Category 4, the second-strongest on the five-step Saffir-Simpson scale, the U.S. National Hurricane Center said in an advisory at 11 p.m. Miami time yesterday.

The U.S. East Coast, known as the Padd 1 region, has 10 operating refineries with a capacity of 1.21 million barrels a day, based on Energy Department data. The area accounts for 7.1 percent of total U.S. operating capacity.(Bloomberg)

Growth of Asia-Pacific Stock Market Followed by U.S. Debt Crisis

As a financial writer & advisor I am writing articles on debt management, debt consolidation. debt advice etc. And also I am a regular writer for various finance related Communities including www.ovlg.com and CDFA.(Blog Guest: Myrina Stein)

The recent America’s debt default has touched the ceiling, and has left many investors to rethink about their personal investment. For past 35 years, during the presidency of Ronald Reagan, U.S. national debt has always been a serious issue. During the presidency of George W. Bush, the national debt of the United States has increased for more than 70 percent. According to the recent survey, the total number of debt stands at over $14 trillion. With the increasing debt ceiling, the market is worried about the U.S. debt default crisis will eventually waive off the 82 days before the deadline. However, this positive impact of the elimination of 81 days has been encouraged by global market sentiment. Industry experts believe that as a consequence, the uncertainty of the global capital market has been ended.

81 days, has fallen in Tokyo stock market for three consecutive days last week. 225 stock average index has opened the rebound, and rose to 10,000 points or even more. On the other hand, the Nikkei ending closing rose 131.98 points to close at 9965.01 points, or 1.3%. Seoul stock market index climbed to 1.8%, to close at 2172.31points.Sydney, Australia stock market have also gained a hit of 2percent, closing up 1.7 percent, to close at 4497.8 points.

Aside from Japan Australia and South Korea, other Asia Pacific market has gained a hit of rise. China and Hong Kong’s Hang Seng index closed rose 223 points to 22,663 points, an increase of 1%. Chinese Taipei’s weighted index rose 57.2 points to close at 8701.38 points, an increase of 0.66%.

Though U.S. debt default has uplifted the stock market of the Asia Pacific countries but yet there is a bit of uncertainty about the outlook. The industry believes that although the U.S. debt farce has ended with the allocation of funds but there is still more to be reallocated. It may flock back to U.S once more or may flock to some other countries also.

State Securities Zhang Youngfeng, vice president of wealth management has pointed out in the “International Finance News” that debt default crisis has lifted up, after the configuration of dollar as hedge funds, and gold may therefore fell. He has also said that the farce of the U.S. debt has been sounding high but people realized that it is not absolutely safe though there is no credit rating cut. But the U.S. debt has weakened the confidence of the market investors. 

However, Zhang Youngfeng believes that U.S. debt will be waived off very soon, and there will be some return to attract back into the United States. In the recent market correction, a reallocation of funds may take place in the U.S. itself, which will lead to a reduction of credit, and will bring in some sensitive investment.

Gold Climbs to Record as Platinum Reaches Three-Year High on Haven Demand

Gold rallied for a sixth day to an all-time high as a global economic slowdown and the European debt crisis boosted demand for a haven. Platinum climbed to the highest level in more than three years.

Immediate-delivery bullion gained as much as 1.5 percent to $1,879.05 an ounce and traded at $1,869.95 at 11:09 a.m. Singapore time. The metal is up 16 percent in August, heading for its best monthly performance since September 1999.

December-delivery gold rose as much as 1.6 percent to a record $1,881.90 an ounce. Bullion priced in sterling advanced to an all-time high, while June-delivery gold on the Tokyo Commodity Exchange and December-delivery metal on the Shanghai Futures Exchange climbed to their highest ever. 

Haven Assets 

“You have a look at some of the other safe-haven assets that investors were looking at, the Swiss franc and Japanese yen,” David Lennox, a resource analyst at Fat Prophets, said from Sydney today. “Authorities there have taken steps to try and curb the rise in those particular currencies. That’s probably pushed more investors into gold.” The franc and the yen weakened today.

The metal’s relative strength index has topped 70 since Aug. 5, a signal to some investors who study technical charts that the metal may be overbought and set to decline. Exchange-traded product holdings fell for the first time in five days on Aug. 19 to 2,211.095 metric tons after reaching a record 2,216.756 tons on Aug. 8, Bloomberg data show. Hedge funds and other money managers trimmed their net-long gold positions by 2 percent to 200,086 contracts in the week to Aug. 16, data from the U.S. Commodity Futures Trading Commission showed.

“A sharp correction would be triggered by a quick resolution or a clear direction of policy on the fiscal side to help the market, which I don’t think would happen anytime soon,” Friesen said from Hong Kong. “Conditions still remain bullish.”

Silver Advances 

Spot silver climbed to the highest in more than three months, gaining as much as 2.5 percent to $43.975 an ounce. December-delivery silver surged 3.6 percent to $44.01, also the highest since May 3. Holdings in exchange-traded products increased for a third day on Aug. 19 to 447.5 million ounces.

“Once the market becomes comfortable with where they see the gold price and the gold price trend becoming a norm, then they start to look at silver,” said Lennox.

The ratio of gold to silver fell to a two-week low as investors sought to protect their wealth in the metal that may also benefit from economic growth. One ounce of gold bought as few as 42.5917 ounces of silver today.
Cash platinum advanced as much as 0.9 percent to $1,891.50 an ounce, the highest price since July 2008, and traded at $1,886. Palladium was little changed at $752 an ounce.(Bloomberg)

Malaysia: Heightened Risk Aversion, Focus on Fundamental

With the current volatility in the equity markets, what should investors rely on? Fundamental - Corporate Earnings. (Author: Yeoh Mei Kei)

Key Points:

• The current consensus estimated corporate earnings for the Malaysia equity market are expected to grow by 12.6% and 14.5% in 2011 and 2012.
• Based on market capitalisation, sectors that represent around 69% and 75% of the FBMKLCI are expected to post double-digit earnings growth in 2011 and 2012 respectively.
• However, with the potential of a slowdown in global economy growth, there is increasing risk that the estimated earnings might be slashed.
• If we revise downward the estimated earnings for 2011 and 2012 by 5% and 7% respectively from the current level, earnings growth is therefore expected to be lower at 7.0% and 12.1% in 2011 and 2012.
• Regardless of this, we remain to see record earnings over the next two years.
• The forward PE based on current estimated earnings and downward revised estimated earnings remain lower than the historical level of 16x, indicating that the Malaysia equity market is still undervalued.
• Both earnings estimation approaches are expected to provide an upside potential of 26.6% and 17.8% by end of 2012.
• Recommended Fund For Malaysia: Kenanga Growth Fund, Areca EquityTRUST Fund

Selling Pressure Emerged As Investors Become More Cautious

As at 11 August 2011, the Malaysia equity market, which represented by the FBMKLCI index, slumped by 3.1% from 1524.43 points (5 August 2011). Investor’s sentiment has weakened due to the resurfacing of double-dip recession fear, while at the same time, the European debt crisis has reduced investor’s risk appetite. Most of the equity markets, including Malaysia, resume their decline after a short-rally on 10 August, where the Federal Reserve promised to keep interest rates low through mid-2013.

Trading volume in Bursa Malaysia has surged since 5 August, with the FBMKLCI moving downward since then (refer to Chart 1). This indicates that selling pressure emerged as investors become more cautious due to the current market volatility. 

Will Corporate Earnings Be Slashed?

We always stress to investors the importance of corporate earnings as the ultimate factor that drives the equity market over the long-term. The current consensus estimated corporate earnings for the Malaysia equity market are expected to grow by 12.6% and 14.5% in 2011 and 2012 (data as at 11 August 2011), mainly supported by the banking sector that have a weightage of about 35% in the FBMKLCI. Other index heavy-weighted sectors such as Telecommunications, Gaming, Plantation, as well as Construction sectors are also expected to post double-digit earnings growth in 2011 and/or 2012 (refer to Table 1). Based on market capitalisation, sectors that represent around 69% and 75% of the FBMKLCI are expected to post double-digit earnings growth in 2011 and 2012 respectively.

Table 1: Estimated Earnings Growth in 2011 and 2012

Sector                Weightage in FBMKLCI (%)       2011       2012

Banks                               35.2                                 13.1%    13.7%

Telecommunications          15.0                                  7.8%    10.2%
Holding Companies           10.3                                 14.2%    12.0%
(Diverse)
Plantation                           8.3                                  10.2%      5.7%
Gaming                              8.0                                  25.9%     11.4%
Chemicals                          4.2                                  11.3%     30.1%
Oil and Gas                       3.8                                    5.5%       6.4%
Construction                      1.4                                   48.2%     14.6%
Auto Manufacturers           1.3                                   37.3%     13.8%
Total                                 87.5                                     -             -

Source: Bloomberg, iFAST compilations. Data as at 11 August 2011


However, with the potential of a slowdown in global economy growth, there is increasing risk that the estimated earnings might be slashed. In fact, consensus data shows that the estimated earnings for 2011 have gradually decreased since 7 August 2011, while earnings for 2012 and 2013 have increased since then (refer to Chart 2). We expect the upcoming quarterly reporting season, which will begin by the 3rd week of August, to serve as a critical factor in determining the adjustment to estimated earnings. 

Chart 2

If we assume the estimated earnings for 2011 and 2012 are revised downward by 5% and 7% respectively from the current level, earnings growth is therefore expected to be lower at 7.0% and 12.1% in 2011 and 2012, as compared to the current estimation stated above. Regardless of this, we remain to see record earnings over the next two years (refer to Chart 3). 

CHART 3: 

Valuations Look Attractive

The Malaysia equity market is currently traded at forward PE of 14.6x and 12.6x based on estimated earnings for 2011 and 2012 (data as at 11 August 2011). If we take a more conservative approach by using the downward revised estimated earnings, the forward PE is estimated to be 15.2x and 13.6x. The forward PE for both approaches remain lower than the historical level of 16x, indicating that the Malaysia equity market is still undervalued. 

In addition, with a fair PE of 16x, the current estimated earnings as well as the downward revised estimated earnings are expected to provide an upside potential of 26.6% and 17.8% by end of 2012. This should be decent returns for investors who are willing to undergo the current market volatility. Investors who wish to have exposure in the Malaysia equity market may consider our recommended funds, the Kenanga Growth Fund and Areca equityTRUST Fund (www.fundsupermart.com.m)

METALS OUTLOOK: Weaker Trade Possible In Gold If Financial Markets Stabilize

Gold prices could see some weakness next week if equity and other financial markets stabilize and concerns about the public indebtedness ease somewhat, market watchers said, but losses could be limited.

After reaching an all-time high of $1,817.60 an ounce for the most-active December gold futures on the Comex division of the New York Mercantile Exchange, gold prices fell. Market watchers said the rebound in the equity markets and the CME Group’s decision to raise margins on gold futures helped to cut some of the gains in gold. The CME Group is the parent of the Comex.

The most-active December contract was trading late in the day around $1,742.60. While that is down on the day, it is still up about 5.5% on the week. September silver was trading late in the day around $39.114 an ounce, up on the day, and up about 2.3% on the week.

In the Kitco News Gold Survey, out of 34 participants, 23 responded this week. Of those 23 participants, four see prices up, while 14 see prices down, and four see prices sideways or unchanged. Market participants include bullion dealers, investment banks, futures traders and technical chart analysts

“Gold is currently overheated after a very sharp rally that was very terse in nature, which left it vulnerable to profit-taking,” said Sterling Smith, commodity trading adviser and market analyst with Country Hedging.

For next week, gold’s direction will be dependent “entirely” on how the equities trade, Smith said. The equity markets in Europe received some support from a short-term ban on short-selling by France, Italy, Belgium and Spain. Once that ban is lifted, stock markets could become heavy again because of banking worries there, he said.

He wouldn’t be surprised if gold trades down to the $1,650 area, but said “I would be a very interested buyer there, depending on the condition of the world at that time.”
Jimmy Tintle, analyst at Transworld Futures, noted there is a gap on technical charts around $1,650, which is why some traders believe gold could pull back to that level. He doesn’t think gold prices will fall that far.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said market watchers should keep an eye on the meeting next week between France and Germany to help calm markets. “If (German Chancellor Angela) Merkel and (French President Nicolas) Sarkozy fail to propose fresh initiatives next Tuesday; if they merely recommit to the July 21 agreement, they risk adding to the market turmoil. Increasing the size of the EFSF (European Financial Stability Facility), agreeing on a European bond are interesting possibilities, but something bolder would be better. The problem with bolder moves, however, is the weak political base and the treaty and constitutional barriers to fiscal union,” Chandler said.

Tintle also said there are several U.S. economic reports out next week which could give traders a sense of how the economy is faring. “Given the debacle we had this week, next week’s economic reports could give us a sense of just how the economy is doing. If the reports are good, gold prices will go down. But if the reports are bad or mixed, that could support gold prices,” he said.

Given the weakness in gold, some market watchers wonder if gold will see the same break as silver did when the CME Group raised margins. Keep in mind that so far the CME Group has raised margins only once so far in gold, but did so several times in silver. Brian LaRose, technical analyst at United-ICAP, noted several levels of support gold prices need to hold to avoid seeing a sharp break or change in trend. The first support ranges between $1,710 and $1,735, he said. Gold has been in a solid move higher from its lows around $1,478 and for the metal to continue on that rally, it needs to hold support, he said.

Critical support is at $1,550 and if gold prices break through that level, then he said gold prices may have peaked.

That level is distant -- so far – and other technical analysts have said the $1,680 to $1,650s area offers a closer level of near-term support.

In silver, LaRose said critical support is at $34.437 and if that level is broken, it might be a sign silver has peaked for now.

Tintle said regarding silver, if equities can rally, silver will be strong, too. Silver is trading more on its industrial usage qualities and less on its safe-haven allure. He said support for the metal is seen around $37 basis the September futures contract. Below that support comes in at $33.50. (Kitco- Exclusive News)

MF Global: Base Metals Rebounding From 'Quite Oversold' Conditions

LME base metals are higher, as are U.S. stock-index futures. “We could see a rather substantial rebound off the lows set in over the course of the day, as markets are now quite oversold, and likely overshot the mark yesterday in terms of the news that triggered the sell-off in the first place,” says MF Global. “Granted, the S&P downgrade was significant, but we would argue that it was not totally unexpected--or wrong.

Moreover, the downgrade did not impact sectors that normally would be crushed by this kind of announcement, namely, the dollar and the U.S. bond market, both of which rallied sharply yesterday. This is in stark contrast to how poorly both the euro and the European bond markets behaved when trading agencies downgraded the debt of euro-zone countries.”

There were worries of the U.S slipping back into recession. “The latter is a legitimate concern, although we do not think it will transpire, as the economy still seems to have enough momentum behind it, weak as the forward thrust seems to be,” says commodities analyst Edward Meir. “Moreover, we should not underestimate the beneficial impact of the decline in energy prices in freeing up extra cash for the consumer, while moderating inflation readings, particularly in emerging markets countries.” (Kitco News)

Treasuries Rise, Reversing Loss, as Asian Share Slide Boosts Debt Demand

Treasuries rose, with 10-year notes reversing earlier losses, as a slide in Asian stocks boosted demand for the relative safety of U.S. government debt.

The yield on the benchmark 10-year security climbed three basis points to 2.53 percent as of 1:01 p.m. in Tokyo, according to Bloomberg Bond Trader prices.(Bloomberg)

Indonesia and Asia ex-Japan Funds Top Gainers in July 2011

The Fundsupermart Indices (FSMI) - All Equity shed 0.9% month-to-date as at 29 July 2011. The top 5 funds were Indonesia and Asia ex-Japan funds; bottom 5 funds were mostly Global funds with high allocation in US and Europe. (Author: iFAST Content and Research Teams)

Key Points:

• FSMI shed 0.9% month-to-date
• Top 5 funds were Indonesia and Asia ex-Japan funds
• Bottom 5 funds were mostly Global funds with high allocation in US and Europe

During the month of July, the MSCI AC World Index shed 3.4% (in RM terms) as the markets focused on two key issues in the US: whether the Republican and Democratic parties can agree on increasing the US debt ceiling before a 2 August deadline, and whether the credit agencies will downgrade the US credit rating. Elsewhere in Europe, Spain took centre stage as Moody's Investor Service placed the country's Aa2 rating on review for a possible downgrade while the country's prime minister announced an early general election, both of which were perceived as increased risks.

The top gainers during the month include Thailand, Indonesia and Japan, as the Stock Exchange of Thailand, Jakarta Composite, and Nikkei 225 gained 10.3%, 5.3 % and 2.8% respectively (in RM terms). During the month, the FSMI - All Equity index shed a marginal 0.9%, bringing the year-to-date returns to 1.8%.

 Date               FSMI- All Equity                Returns                              Returns

                                                         (month-to-date)                 (year-to-date)  

30-Dec-10           1,529.9                           3.2%                                    12.6%
31-Jan-11            1,529.5                           0.3%                                     0.3%  
25-Feb-11           1,509.9                         -1.7%                                    -1.3% 
31-Mar-11           1,567.0                          3.6%                                      2.2%
27-Apr-11            1,559.8                           0.4%                                     2.6% 
31-May-11           1,577.0                           0.4%                                     3.1% 
30-Jun-11            1,572.5                         -0.3%                                      2.8% 
29-Jul-11             1,557.7                         -0.9%                                      1.8%  

Source: iFAST Compilations, as at 29 July 2011. Performance figures in the table are in RM terms,
calculated using NAV prices, with any income or dividend reinvested.

Indonesia, and AxJ too?

During the month, the MSCI Asia ex-Japan index slid 0.9% (in RM terms) while surprisingly, the top Asia ex-Japan funds (Table 2 below) returned at least 5.3%, pointing to the savvy stock picking skills of the fund manager.

In Indonesia, consumer confidence rose marginally from 105.3 points in May to 109.0 points in June due to better confidence on family income and employment expectations, suggesting that consumer spending is likely to improve in the coming months. Foreign funds continued to flow in during July, recording a net inflow of USD608 million for the month and bringing year-to-date figures to a net inflow of USD2,687 million (calendar year 2010: USD2,352 million net inflow).

On the currency exchange front, the RM strengthened against most major currencies, including the euro and US dollar by 3.3% and 1.8% respectively, while at the same time weakening against the yen and baht by 1.9% and 1.3% respectively. Since the start of 2011, the RM had risen against the US dollar and baht by 3.3% and 2.7% respectively and weakened against the euro and Aussie dollar by 3.9%, and 3.1% respectively (as of 29 July 2011).

Table 2: Top Five Equity Funds in July 2011

                                                                                                Return (%)
Top 5 Equity Funds       Market/Sector               (mth-to-date)(yr-to-date)
 OSK -UOB Asian               Asia excluding Japan;                    6.1              1.8
 Growth Opportunities          Small to Medium Companies 
 Fund

OSK-UOB Indonesia             Indonesia                                   6.0              9.3*
Equity Growth Fund 

OSK-UOB Asia                   Asia excluding Japan;                   5.3              8.6
Consumer Fund                     Consumer       

OSK-UOB Asean                 ASEAN                                      4.8              9.7
Fund



Prudential Indonesia                Indonesia                               4.6             5.5**
Equity Fund

Source: iFAST compilations, as at 29th July 2011. Performance figures in the are in RM terms, calculated using NAV prices, with any income or dividend reinvested.
* Since inception on 4th April 2011
** Since inception on 27th April 2011

US and Europe Beset by Debt Problems

The worst performers during the month include US and Europe as the STOXX Europe 600 and S&P 500 shed 5.3% and 3.8% respectively (in RM terms).

On the economic front, the rate of growth of the manufacturing and services sectors in Eurozone continue to decelerate as services and manufacturing PMIs (Purchasing Managers Index) extended their downward trend for the third month. The weakness showed by the PMIs (although still suggesting growth albeit at a slower rate) has adversely affected business confidence levels as well. 

In the US, economic data was mixed. Nonfarm payrolls rose by 18,000 in June, a far cry from the 105,000 expected by economists. A breakdown of the figure by industry indicates that severe job cuts were not a feature of any single segment, with government workers contributing the bulk of the job cuts for June. This supports the view that the US economy is not in a state of deterioration, where we would expect companies (rather than the government) to slash workers more vigorously.

Table 3: Bottom Five Equity Funds in July 2011

                                                                                             Return (%)
Bottom  5  Equity Funds     Market / Sector     (mth-to-date)(yr-to-date)

 Prundential Country 
Selection Fund                              Global                         -6.8                 -2.0 

TA European Equity 
Fund                                        Europe including UK        -4.9                  0.7

RHB Global Themes
Fund                                           Global                          -4.2                   3.4


RHB Global Fortune
Fund                                           Global                           -4.1                   0.8


OSK-UOB Equity
Yield Fund                                  Global                           -4.0                  -0.8




Source: iFAST Compilations, as at 29 July 2011. Performance figures in the table are in RM terms, calculated using NAV prices, with any income or dividend reinvested.

 
 

The Importance of Reinvesting Dividends - A look back at the local stock market’s performance since 1993 highlights the importance of reinvesting dividends (Author: iFAST Research Team)

Keypoints:

• The power of compounding in investing stems from earning interest on interest already earned
• While buy-and-hold investors in the stock market are already compounding investment returns, the reinvestment of dividends can be tricky
• Our analysis of returns for the Malaysia equity market indicates that reinvesting dividends made a significant positive impact on long-term returns
• Stock market investors may find it difficult to reinvest dividends received
• Unit trusts facilitate dividend reinvestments in three ways: 1) via reinvestment of income by the fund manager, 2) reinvestment via the creation of new fund units, and 3) low minimum subsequent investment amounts, which allows for reinvestment of dividends earned elsewhere

Harnessing the power of compounding is a well-documented investment strategy (see The Power of Compounding In Investing), which works on the basis of earning additional interest on interest already earned. For example, suppose you start with a RM1,000 investment and you have a profit of 10% (RM100) after one year, leaving you with total assets of RM1,100 at the end of the year. Instead of spending the RM100 profit, harnessing the power of compounding means that you would now start the new year with RM1,100 to invest, and seek to earn a profit not only on your initial RM1,000 but also on the additional RM100 earned in the first year.

In the early stage of an investment, the difference in returns may not be very significant. However, time is a crucial friend of investors seeking to compound returns, and as Chart 1 indicates, the hypothetical returns of a compounding approach versus a non-compounding approach deviate substantially as time goes by.

Chart 1: Hypothetical 10% return

Source: Bloomberg, iFAST compilations

Compounding and the Stock Market

Having briefly described the power of compounding, how then does compounding apply when one invests in the stock market? By adopting a buy-and-hold approach to stock investing, one is already compounding returns, with the exception of dividends. Over short periods of time, dividends are less crucial, but as our testing below on the local stock market shows, the reinvestment of dividends can make a significant difference over an extended period of time.

Reinvested dividends had a substantial impact on long-term returns
Chart 2: FTSE Bursa Malaysia KLCI Performance

Source: Bloomberg, iFAST compilations based on monthly data

Using data from 1 January 1993 to 31 December 2010, we looked at the difference in returns between excluding dividends (index level), with dividends not reinvested, and with dividends reinvested. Over the 18-year period, the index rose from 643.96 to 1,518.91 giving an annualised return of 4.8%. With the inclusion of dividends (and assuming no reinvestment), the annualised return was 6.7%. However, if an investor reinvested the dividends received over the period back into in the stock market, he would have an 8.0% annualised return. While the incremental return does not appear very significant, it actually resulted in a hefty difference in cumulative returns over the period; at 135.9%, 222.0% and 301.9% respectively (Chart 2).

Reinvesting dividends important, but difficult to implement

Even with a seemingly-paltry dividend yield on the market (from 1993 to 2010, the annual dividend yield for KLCI component stocks averaged just 2.7%), the reinvestment of dividends still delivered a significant improvement to an investor’s returns, highlighting the power of compounding. From a practical standpoint, reinvesting dividends is not such an easy task. Investors who receive stock dividends may find that the amounts of cash received are insufficient for direct reinvestment in the stock market, and may have to accumulate dividends for years before collecting enough to perform a cost-effective reinvestment. In addition, while saving up for a reinvestment in the stock market, investors also incur opportunity costs for having idle cash.

Reinvestment easily done via Unit Trusts

Unit trusts offer a solution to reinvestment woes in three ways. Firstly, the structure of a unit trust allows for easier and cost-effective reinvestment of dividends at the fund level, since the fund holds a large pool of assets and thus dividends received are also substantial in value. Such activity is performed by the fund manager, which means investors who hold the unit trust do not have to worry about the reinvestment of dividends. 

Secondly for all the funds on our platform which pay dividends, we automatically reinvest the dividend payouts on behalf of investors. This means that the investor will end up with more units than he originally had. Unlike stocks, fund units can be fractional, which means that payouts of small amounts can be reinvested easily.

Thirdly, even if one has the majority of portfolio holdings in the stock market via individual stocks, unit trusts offer a means to reinvest cash dividends received (from the stocks). After meeting the minimum investment amount (usually RM1,000), investors can add as little as RM100 via each subsequent investment, which enables stock investors to convert their cash dividends to additional stock market exposure (via unit trusts), thus allowing for further compounding of investment returns.

Kuwait’s Gulf Investment Corp issues RM750mil sukuk

KUALA LUMPUR: Gulf Investment Corp GSC, Kuwait (GIC), issued RM750mil (US$253mil) under its existing 20-year RM3.5bil (US$1.18bil) sukuk wakalah bi istithmar medium term notes programme (GIC sukuk).

AmInvestment Bank Bhd acted as the sole lead manager for this GIC sukuk issuance with AmIslamic Bank Bhd appointed as the transaction agent to facilitate the commodity trading via the Suq Al-Sila’ trading platform on Bursa Malaysia.

This is the second issuance from the GIC sukuk and the fourth issuance from GIC in Malaysia since 2008.

The GIC sukuk has been assigned a long term rating of AAA by RAM Rating Services Bhd.

This second issuance from the GIC sukuk in 2011 has a tenure of 5 years and carries a semi-annual profit payment of 4.9% per annum.

In March this year, GIC sold its first tranche of RM600mil (US$202mil) 5-year GIC sukuk in Malaysia at a yield of 5.25% per annum.

Malaysia’s benchmark five-year Islamic government securities last fetched a yield of 3.59% per annum.

Despite the recent uncertainties in the global markets, the issuing pricing process was competitive and managed to come in tighter than the issuance in March, meeting with GIC’s current target pricing levels.

A broad range of local investors including fund managers, insurance companies, financial institutions and government agencies participated in the issue which represents the largest issue launched to date by GIC.

In 2008, GIC issued its inaugural dual tranche conventional bonds with tenures of five years (RM600mil or US$202mil) and 15 years (RM400mil or US$135mil) in the Malaysian capital markets, the first by a Gulf Cooperation Council (GCC) issuer.

The GIC sukuk is based on the underlying syariah principles of wakalah (agency) and istithmar (investment).

GIC, as the issuer, will issue the sukuk in one or several series under a programme.

The investors will provide capital as investment for their subscription of a particular series.

The 20-year programme will provide GIC greater flexibility to issue sukuk of varying tenures of up to 10 years on a ‘need to’ basis from time to time to fund its general working capital requirements that conform to syariah principles at competitive pricing given its strong credit rating, underscored by its strengthening credit fundamentals and improved asset quality.

Gulf Investment Corp is a leading financial institution offering a comprehensive range of financial services to promote private enterprise and support economic growth in the GCC region.(The Star Online)

Oil Slides a Fourth Day as U.S. Spending Drops, Moody’s Warns of Downgrade

Oil declined for a fourth day in New York, its longest losing streak since May, as investors bet that signs of a slowing U.S. economy indicate fuel demand will falter in the world’s biggest crude-consuming nation.

Futures slipped as much as 0.7 percent today after U.S. consumer spending unexpectedly fell in June for the first time in almost two years. Moody’s Investors Service said the nation’s credit rating may be downgraded on concerns that fiscal discipline will ease, further debt reduction measures won’t be adopted and the economy will weaken. Oil is also declining after breaching a technical support level.

“The economic numbers are reflecting that demand is weak in the U.S.,” said Jonathan Barratt, a managing director of Commodity Broking Services Pty in Sydney, who predicts oil will average $100 a barrel this year. “Prices could come back to the $90 level, if not more.”

Crude for September delivery dropped as much as 69 cents to $93.10 a barrel in electronic trading on the New York Mercantile Exchange, and was at $93.42 at 1:15 p.m. Sydney time. It’s the longest losing streak since the five days of declines to May 6. The contract yesterday slid $1.10 to $93.79. Prices are 13 percent higher the past year.

Brent oil for September settlement declined 52 cents, or 0.5 percent, to $115.94 a barrel on the London-based ICE Futures Europe exchange. The European benchmark contract was at a premium of $22.54 to U.S. futures, compared with a record close of $22.67 yesterday.
Moving Average

Oil is extending losses in New York after dropping below the 200-day moving average yesterday, a long-term support level at about $95 a barrel, according to data compiled by Bloomberg. A breach of technical support usually means prices will continue to fall. Front-month futures may decline to the lower Bollinger Band, around $91.11 today.

U.S. spending dropped 0.2 percent in June, Commerce Department figures showed yesterday. The median estimate of 77 economists surveyed by Bloomberg News called for a 0.1 percent increase. Incomes grew at the slowest pace since November.

The odds of another economic downturn are rising amid cutbacks in spending by consumers and the government, according to five of the nine members of the U.S. panel that dates recessions, the Business Cycle Dating Committee of the National Bureau of Economic Research.

The U.S. probably failed to create enough jobs in July to reduce unemployment. Payrolls probably climbed by 85,000 workers after an 18,000 increase in June that was the smallest this year, according to the median forecast of 81 economists surveyed by Bloomberg News before a Labor Department report Aug. 5.
Oil Supplies

“Commodity investors are expected to remain cautious ahead of this Friday’s U.S. jobs report,” Mark Pervan, head of commodity research at Australia & New Zealand Banking Group Ltd. in Melbourne, said in a note today. The bank estimates oil in New York will average $100 a barrel in the third quarter. Prices fell “as investors focused on the weaker state of the U.S. economy and softer demand,” he said.

U.S. crude stockpiles declined 3.31 million barrels last week to 354.9 million, according to the industry-funded American Petroleum Institute. An Energy Department report today may show inventories climbed 1.5 million barrels, the median of 14 analyst estimates in a Bloomberg News survey shows.

Gasoline supplies increased 2.55 million barrels to 212.2 million, the American Petroleum Institute said. The Energy Department report may show they rose 250,000 barrels, according to the Bloomberg News survey.
Negative Outlook

The American Petroleum Institute collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department for its weekly survey. Oil-supply totals from the API and the department have moved in the same direction 71 percent of the time over the past year and 76 percent over the past four years.

The U.S., rated Aaa since 1917, was placed on negative outlook, New York-based Moody’s said in a statement today as it confirmed the rating. Moody’s warned on July 29 a negative outlook was “more likely” as lawmakers reduced the size of spending cuts being negotiated to win approval on a plan to lift the nation’s borrowing limit.

Tropical Storm Emily gained speed as it approached the Caribbean island of Hispaniola, where it should make landfall today and bring as much as 10 inches (25 centimeters) of rain, the U.S. National Hurricane Center said in an advisory released before 8 p.m. Miami time. (Bloomberg)

Bunds Climb, Italian, Spanish Bonds Drop After U.S. ISM Data

Bunds rose while Italian and Spanish bonds dropped as an index of U.S. manufacturing fell more than forecast, fueling concern there will be a slowdown in the world’s largest economy and boosting demand for safer assets.

German government bond yields slumped to the lowest level since November amid speculation that the U.S. will lose its top credit rating, even after a deal was struck to raise the nation’s debt ceiling.

Both Europe and the U.S. seem to be mired in weak growth.

Ten-year bund yields dropped six basis points to 2.48 percent at 4:22 p.m. in London, after earlier rising six basis points to 2.59 percent. The 3.25 percent security maturing in July 2021 rose 0.565, or 5.65 euros per 1,000-euro ($1,422) face amount, to 106.720. Yields on two-year notes were also five basis points lower, at 1.11 percent.


Italian, Spanish Spreads

The yield on 10-year Italian bonds rose 14 basis points to 6.01 percent, reversing an earlier decline and approaching the 6.027 percent euro-era record reached on July 18, before the latest bailout for Greece was announced.

Yields on 10-year Spanish debt climbed 11 basis points to 6.19 percent, after dropping to 5.95 percent before the U.S. data was released. The Spanish-German yield spread widened to 372 basis points.



Credit-Default Swaps

Spain and Italy led an increase in the cost of insuring European sovereign debt. Credit-default swaps on Spain jumped nine basis points to 374, approaching the record 385 set last month, according to CMA. Italy climbed seven to 323, nearing an all-time high of 331.

Swaps on Greece, Portugal, Ireland and Belgium also rose, pushing the Markit iTraxx SovX Western Europe Index of swaps on 15 governments up 5 basis points to 276.

France auctioned 8.5 billion euro of 84-, 175- and 357-day bills. The Netherlands sold 2.46 billion euros of three-month bills at an average yield of 0.9 percent, six-month bills at 1 percent and nine-month bills at 1.105 percent.

German government bonds handed investors 3 percent this year, compared with 4.3 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds have lost 0.2 percent, while Italian debt has slipped 3.5 percent and Portugal’s has declined 22 percent, the indexes show.