Malaysia : expanding bonds

flag of malaysiaAlready one of the largest bond markets in Asia, Malaysia is working to expand its bond activity horizontally and vertically, extending the scope of existing products while planning to offer new products to attract more funds.

As part of these efforts the Malaysian stock exchange is looking to encourage wider bond activity, having announced plans to launch a secondary trading platform for bonds, including Islamic paper.

Though no exact timeline has been set for the move, Raja Teh Maimunah Raja Abdul Aziz, Bursa Malaysia‘s global head of Islamic capital markets, said the introduction of a secondary bond trading platform was a response to demand from retail investors and would improve transparency.

“The only way to bring retailers on would be through the exchange,” she said in an interview with the Reuters news agency in early October. “The over-the-counter market is not transparent in terms of pricing so you cannot get the retailers to come on.”

Once issued, there is little trading in most Islamic bonds, with Raja Teh describing the focus on fixed income as a defensive investment. Defensive or not, there are some, such as Mohd Razlan Mohamed, the chief executive officer of Malaysian Rating Corporation Berhad (MARC), who question the timeliness of the proposed secondary trading platform.

“The local markets are not ready for a secondary trading system for three reasons, investors can invest in bond funds already, which provides them with exposure; there are cost implication for bond issuers, this will drive up costs; and thirdly, this is for sophisticated investors only, most don’t understand a lot of the existing products on the market.”

For Steven Choy, the chief executive officer of Cagamas Berhad, Malaysia’s national mortgage corporation and leading securitisation house, said there needed to be more issuance to develop the secondary bond market.

“We are already the largest in South-east Asia, the third in Asia, but it is mostly buy-and-hold insurance companies who want long term-paper and they do not trade. Therefore, we need more depth and issuance,” he told OBG.

The government has moved to address the question of issuance, setting up Danajamin Nasional, a state-owned institution tasked with providing financial guarantees to issues of private debt and Islamic securities, in March this year as part of its economic stimulation programme.

The agency was provided with a paid-in capital of $290m when established, a figure officials said could be doubled, and its charter allows it to offer insurance for investment-grade public debt or Islamic securities totalling up to $4.3bn.

On October 8, Prime Minister Datuk Seri Najib Razak told a press conference that Danajamin had already received seven applications so far, though he did not clarify whether these had been finalised.

While the government believes Danajamin will broaden the base of the bond sector and encourage more investors to buy into the market, not all agree, taking issue with the agency’s focus on the already well-served triple-A bonds segments.

Cagamas’ CEO warns that rather than strengthen the bond market, Danajamin could have an adverse effect by targeting triple-A bonds to the exclusion of others.

“Danajamin’s role in the market has been to distort it. If they issue for only triple-A bonds then who will buy BB for example,” said Choy.

With the economic crisis having hit at lesser rated bonds, there has been a drying up of credit for smaller companies, according to Razlan.

“Up until Q2 2008 business was good, but then risk aversion set in and investors did not even want to know about single-A rated bonds, they would only look at triple-A bonds,” he said. “No one wanted to invest or underwrite these bonds yet they form 30-40% of the market. This was not because of a lack of liquidity but risk aversion.”

Tan Sri Datuk C Rajandram, the executive deputy chairman of Rating Agency Malaysia Holdings (RAM), concurs, saying that the demand side has become more risk averse, with bonds lower than AA not coming onto the market.

“The economy is down and so the requirement for funding has also dropped. Much will depend on the stimulus packages,” he said in an interview with OBG. “Everyone is avoiding the corporate sector, with no attraction to place bonds on the market, even though in Malaysia banks are very liquid.”

Though most experts agree that there are high levels of liquidity in the market, more needs to be done to increase the appeal of bonds below triple-A. According to a report issued on October 9 by MARC, the value of newly rated bonds assigned and announced in Malaysia for the first nine months of the year totalled $9.3bn, mainly at the top of the ratings range.

While this trend is expected to continue in the short term, with the Malaysian economy set to move out of recession and post solid growth next year, investors could be less adverse to a bit of risk, and more enthused for bonds.

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ChiNext launch poses problems as well as opportunities

MARKETS-CHINA-STOCKS-RECORDThis week, China will be launching a ground breaking new secondary market & trading platform that hopes to help smaller technology companies attract investment in domestic IPOs.

Small & Medium Sized Enterprises (SME’s), are the mainstay of the Chinese economy, as they provide the largest employment base as China moves towards a more enterprise based economy. However, smaller companies have found it difficult to raise funding, as the large commercial banks concentrate on state owned enterprises.

Shenzen based ChiNext, which is being hailed as a Nasdaq style trading board will begin trading on Friday 30th October in the hope that traded entities will be able to take advantage of excessive liquidity, expecially in retail investment markets. It is believed that investors will be attracted to new opportunities to stake a claim in up & coming tech startups, but also by the more relaxed trading environment, as companies listed on ChiNext will not face the Byzantine rules that are applied to A & B class share issues in Shanghai.

“The launch of ChiNext represents a milestone in the development of China’s financial markets and is an important part of the government’s plans to boost support for small and medium-sized firms,” said Jing Ulrich, Managing Director of China equities at JP Morgan, Hong Kong. “The board will provide an additional source of financing for younger companies while broadening the options available to investors.”

More importantly, it is expected that ChiNext will also draw in private equity & venture capital firms, which are critical to helping startups gain a foothold in global markets. According to Jackson Wong from Tanrich Securities, these investment vehicles will be more likely to take part, since they have more routes to cash out on their investments, with an avid pool of retail investors ready to speculate.

“The launch of the growth enterprise board is an important step towards implementing the national strategy on promoting innovation,” Shang Fulin, chairman of the China Securities Regulatory Commission, said last week. The first 28 companies to list on the board, ranging from software to medical equipment makers, have raised 16 billion yuan (US$2.3 billion) in their initial public offerings — more than double initial forecasts.

Well known China investor Jim Rogers (he of the dickie bow) according to this report from CCTV is watching the new bourse with great interest, although he hasn’t invested in any of the companies that will IPO this week, any move he makes in the near future is bound to be followed by Sinophile investors

So far, more than 9 million people have opened  trading accounts with the ChiNext platform, fuelling fears that there may be some price fluctuations in the offing. According to CCTV.com, the average price-earnings ratio for 28 companies  due to list on Friday is 56, which is a hefty premium on the average 25 encountered on comparable listings on the Shanghai A list.

Wang Yiwen, GM of Shanghai Deding Investment Management  said, “The IPO prices for those firms have been set very high. This will cause pricing and trading issues for the secondary market. Take the SME board at the A-share market as an example. When the SME board starting trading in June 2004, 8 firms got listed. Their share prices all opened and ended higher on that day. But prices soon started declining after 5 to 10 trading days, with some losing nearly half their values.”

So it would seem that we will see some initial decay, but all in all, this is an exciting move for China’s retail investors individually & global investors as a whole. Hopefully ChiNext will give some small domestic companies a financial springboard which will allow thenm to accelerate growth before performing secondaries in Hong Kong & on the NASDAQ & NYSE in the future.

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Growth in Russian economy, but no champagne corks yet

russian economyRussia’s economy may have expanded as much as 4% in the last quarter of 2009 following a timid return to growth in the third quarter, according to Deputy Economy Minister Andrei Klepach speaking at a conference in Moscow last week.

The economy may show “quite strong growth” of between 3% & 4% in the fourth quarter from the previous three months, Klepach said. This is an interesting claim, and doubly so given that Klepach has been quite cautious so far this year in his claims. Evidently the rising price of oil and the return of some financial flows into Russia is firing up optimism.

GDP expanded 0.6 percent in the third quarter as compared to the second quarter according to Economy Ministry data out this week. Whilst the economy also grew 0.5%  between August and September, with month-on-month growth being due to a “good grain harvest,” increased meat production and an improvement in manufacturing output, the Economy Ministry said.

Nonetheless the economy still managed to register an annual decline of 9.4%, compared with a 10.9%  record annual contraction in the second quarter.

Certainly foreign investment into Russia is on the rebound. On Oct. 19th Klepach predicted the country may see a small capital inflow this month, and no net outflow in the fourth quarter. This compares with a net capital outflow of $31.5 billion in the third quarter. In September, the net outflow was $6 billion, down from $16 billion in July. This indicates that foreign investors are returning to Russia’s capital markets, while Russian companies and banks are increasingly able to access international markets. However,  this improvement isn’t necessarily great cause for celebration. The increase in foreign investment is largely being driven by bank lending and portfolio investment, which can easily go into reverse.

This must most certainly be one of the reasons behind Russia’s central bank recent decision to lower key interest rates by half a percentage point for the second time in a month, in a bid to both stimulate lending & also to stem the inflow of funds & the rise in the value of the ruble which is making the work of restoring competitiveness to the manufactured sector all the more difficult.

Six million Russians were added to the government’s official poverty count in the first quarter. By the end of 2009, 17.4% of the population or 24.6 million people will be living beneath the subsistence level of $185 per month, almost 5% more than before crisis, according to World Bank estimates. Unicredit analysts forecast that the number of Russians with disposable incomes of more than $1,000 per month will fall 48% this year to about 13.6 million, or roughly 10% of the population.

Russia’s consumer prices were flat in August, the lowest monthly reading in four years, but annual inflation was still running at 11.6%. Producer prices, on the other hand, are falling fast, and declined an annual 10.8 percent in August, compared with a record 12.3 percent in July. Today’s decision follows the announcement earlier this month that the Russian economy suffered a record economic contraction in the second three months of the year and refelect the growing recognition that the country now faces a painfully slow recovery. Just how painful things might become will form the subject matter of this report.

The full report from Bank Rosii can be accessed here : Country Briefing Report

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Positive figures from Redecard will push Brazilian retail bank shares

redecardAs we have discussed in previous articles, Brazil’s retail banking sector has been enjoying a buoyant 2009 so far. This would seem set to continue as payment card processor Redecard posts an 18% jump in financial volumes.

This should be seen as a positive for Itaú Unibanco (NYSE: ITUB), which controls Redecard, as net income for the third quarter rose to BR$333M ($195M), with financial transactions across the payment platform registering BR$ 24.7Bn ($14.52Bn) & more interestingly, the debit card side rising in step by 17% to BR$12.2Bn ($7.13Bn).

Although there is general negativity on global credit card companies, particularly in Western economies, Brazil’s nascent credit sector has benefitted from a wave of bank consolidation over the last 18 months, the strength of the real versus the US dollar & one of the strongest economies to exit the finiancial crisis. Earlier this year, Visa affiliate VisaNet was the star IPO on the BOVESPA, with the launch being hugely oversubscribed by both retail & institutional investors, raising a record of $4.5Bn.

“We think the results were solid and highlight the strength of the credit and debit card markets,” reported Deutsche Bank which keeps a buy rating on Redecard. “While regulation remains a key risk, we think that it is already priced in.”

For Redecard, it is also very much a case of being seen as a Brazilian brand, which seems to be helping it’s positioning against VisaNet, which although no longer owned by Visa, retains the association. Redecard has the benefit of being able to position itself as a multi-brand entity & is more popular with Brazilian retail customers, especially in the growing debit card sector, whilst VisaNet is to some extent still regarded as a premium brand.

So, short term one-up for ITUB & we expect to see shares taking a ride higher over the next few days. VisaNet reports later this week (October 28th), so it will be interesting to see if Bradesco will be able to catch the same sentiment wave.

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Negative signals for Chinese economy, will they take heed

CHINA STOCKS FALLWhile the Chinese economy expanded 8.9% in Q3, propped up by easy credit & continued government spending programmes, Europe, US & Japan continue to flounder. The world’s 3rd largest economy has recorded 7.7% overall growth in the first 9 months of 2009, with officials saying they are confident that the much talked about annual growth target of 8% will be acheived.

Last November, as it became clear that the global economy was heading into a recessionary period, central government implemented a 4 Trillion yuan/$586 Bn stimulus package, aimed at cushioning the blow of decreasing exports on the economy whilst also improving industrial efficiency at all levels. Via this stimulus package, China has implemented a number of schemes that impact practically all sectors in the economy;  real estate/construction, transportation infrastructure, agriculture, social services, industry, earthquake reconstruction, technology advancement & rural development being amongst those receiving special focus.

The strategy has paid off, with growth rising to 7.9% in Q2 from 6.1% in Q1 2009. Figures show that industrial output has risen 8.7% in the first three quarters of the year, and 12.4% in July-September, which would seem to signal accelerated demand from domestic purchasers, keen to take advantage of low cost loans to invest in the expected turranround for China in 2010.

However, while surging purchases of coal, iron ore & other raw materials have helped mining majors such as Vale & BHP Billiton the impact of China’s comeback has mainly been one of improving global sentiment than of actually driving growth, according to Stephen Green, economist for Standard Chartered Bank in Shanghai.

“Exports remain the key weakness for the Chinese economy,” Moody’s Economy.com economist Alaistair Chan said in a report yesterday.

Our view is that it is time for those investing in China to pay attention to people like Chan, as investment via the stimulus package has accounted for nearly 88% of GDP growth this year. Central government  investment in factories, construction & national infrastructure has risen by one third in the first three quarters of this year to a record 15.5 trillion yuan (US$2.27 trillion).

As the economy “flourishes”, this heavy reliance on public works & other investments could be masking long term issues for the Chinese economy. Impressive as China’s ability to ride out the storm has been, companies desperately need to restart exports to offset the economies depenfdance on fiscal hand outs.

This week China’s leaders have also  signalled concern over these obvious imbalances in the economy, with the State Council saying policy must shift to dealing with waste and other associated problems of high growth.

“In the first three quarters, the pace of economic growth quickened,” the State Council said “At the same time, we also are clearly aware that there are still difficulties and problems in the economic and social development of our country.”

So it looks as though there are a number of challenges ahead for China in the near future. The stimulus package has obviously been deployed in a much more effective manner than in Europe & the US, however China has not had the crippling effects of masssive credit & huge write downs in it’s nascent financial sector. Although the Chinese have made a number of efforts to open new markets through bilateral trade agreements & an accelerated FTA programme with neighbouring countries in Asia & it’s BRIC partners, it cannot fully offset the real factor of dependancy on Western markets indefinitely.

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Jordanian education pressured by asylum seekers

Flag Of JordanJordan is implementing a number of reforms to maintain the high standard of its education network in the face of increasing student numbers, competing calls for state funding and needed modernisation.

The kingdom’s education system has scored well in a series of international assessments, with the World Bank rating Jordan, along with Kuwait, as the leading education reformer in the Middle East and Northern African (MENA) region in 2008. UNESCO also ranked the country 18th out of 94 nations for providing gender equality in education.

Education has long been one of the top priorities for the Jordanian government, which dedicates around 13% of the state budget to the sector every year, with spending on public and private education accounting for 6.4% of GDP.

This focus on education extends to the tertiary system, where around 30% of all students are taking courses in education, the highest single study stream, eclipsing other courses. Given the growing numbers of students entering the system, with some 150,000 commencing their first year of school annually, the demand for teachers is increasing, offering those studying education at university a solid career path.

This year alone, the Ministry of Education appointed 4000 new teachers to meet the needs of the school system, taking the number of teachers and administrative staff in Jordan’s state schools to 90,000.

Though the ministry has been increasing staff numbers, and improving infrastructure through a nationwide programme of building new schools and upgrading existing facilities, the downturn in the economy has had a flow-on effect on the country’s education system.

While the Jordanian economy is expected to continue its expansion this year, with both the government and the IMF predicting GDP will grow by around 3%, this is well down on the 6% rise in 2008. This slowing of the economy has seen many families becoming more cautious, with an increasing number withdrawing their children from private schools and enrolling them in public ones.

There are some 1.6m students currently in the Jordanian education system, three-quarters of who are enrolled in the state’s 3300 schools, with the remaining 400,000 attending one of the 2400 private institutions across the country. However, according to reports in the local media, almost 11,000 students formerly attending private schools have transferred into the state system this year due to what was described as “economic considerations”. This comes on top to the 31,000 students who moved to public schools in the 2008/09 academic year.

According to Fayez Suidy, the director of the ministry’s Private Education Department, economic pressures are the underlying cause of students leaving the private segment.

“Each year, parents decide to move their students from public to private schools and vice versa, but financial matters remain the main reason behind the transfers,” Suidy said in an interview with the Jordan Times in late August.

This flow of students back to state schools will increase the demands being put on the public education system, in terms of staff, materials and infrastructure requirements.

Adding to the strain placed on the education system is the large numbers of young Iraqis, children of families who fled their own country, who are now attending schools in the kingdom. In 2007, the Jordanian government approved a proposal to allow Iraqi children living in the country to attend state schools for free, with 24,000 enrolling in the 2007/08 academic year, and 26,000 in 2008/09.

While this is only a fraction of the students attending state schools, representing around 2%, the figure is rising and there is little sign that these students and their families will be returning home any time soon.

Furthermore, according to a recent report by the Private School Owners Association, Iraqi children make up 10% of students attending non-state schools, though this figure is expected to fall due to rising costs, with at least some expected to transfer to the public system.

These pressures could cause the educational budget to be spread somewhat thinly in the coming years, as the growing numbers of students may force the authorities to spend more to provide basic facilities and materials rather than new schools and improved technology.

With the government having to balance the many demands on its limited funds, the country’s education system should remain adequately resourced to maintain present service, but without a major increase in its budget may find it hard to step up a class.

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Nigerian Stock Exchange down by 30% so far in 2009

nigerian stock exchange2009 is shaping up as a transitional one for Nigerian capital markets, with investors still cautiously trading as the effects of slower economic growth and restructuring in the dominant banking sector play out.

In September, the Nigerian Stock Exchange (NSE) clocked up a turnover of 9.05bn shares, with a total value of N66.01bn ($434.2m), with 123,106 deals completed, according to the bourse’s monthly report. This represented an 8.7% decline in trading volume from the previous month, and a 4.0% fall in value, following respective drops of 0.1% and 5.03% in August.

The overall picture for the first three quarters of 2009 is sharply down on the same period of last year, with volumes falling to 75.3bn shares traded, 45.6% lower than 169.63bn units in January-September 2009, and value dropping to N508.7bn ($3.3bn), down 74.5% on N2.23trn ($14.6bn).

The Nigerian Stock Exchange All-Share Index (NSE ASI) fell 944.10 points, or 4.1%, through September to 23,009.10. The index has fallen 29.84% from 31,450.78 at the close of 2008.

Meanwhile, market capitalisation totalled N7.81trn ($51.8bn) at the end of September, dropping 1.43% on the month and down 18.3% from N9.56trn ($63.6bn) at the end of last year, though comfortably above the 2008 nadir of N6.21trn ($41bn).

There are several reasons for the NSE’s sluggish performance, most of which fundamentally stem from the impact that the global economic crisis has had on Nigeria. The IMF has forecast that the country’s growth will be trimmed to 2.9% this year, from 6.0% in 2008 and 7.0% in 2007, while declining oil revenues have slowed the flow of cash into the economy and government coffers. Furthermore, the tightening of credit worldwide has seen capital flows to shrink, while investors have retreated, particularly in some emerging markets.

There are also domestic issues that have affected the NSE’s performance, which, like many of the world’s markets, has yet to show strong signs of recovery. Part of the slow turnabout may be due to a partial correction that has lingered in the markets, following meteoric 74.73% growth in market capitalisation in 2007.

The country’s banking sector, which has been notoriously vulnerable to crisis, has also hampered growth. Banks dominate the NSE, accounting for 71.3% of transactions by value in September; four of the five biggest companies on the bourse are banks, alone accounting for nearly 17% of market capitalisation. The IMF praised Nigeria’s banking sector in June, saying that “Financial stability has been sustained in the face of severe pressures related to global and domestic developments. This success reflects the well-capitalised banking system and crisis-related actions of the central bank.”

Nonetheless, Nigeria’s banks have been far from immune. The NSE has reflected the impact of the tightening in liquidity and the drying up of interbank lending on banks. The results of the Central Bank of Nigeria (CBN) stress tests over the summer, which five banks failed due to large non-performing loan portfolios, prompted a $2.5bn bailout, the resignation of senior management and a suspension of trading for the banks involved.

With analysts now expecting another wave of consolidation, with 23 banks potentially being reduced to 15, investors may continue to hold back until the dust has settled and potentially expensive mergers and acquisitions have gone through.

Ongoing concerns about regulation and irregularities may also be holding the exchange back from full-blooded recovery. On October 19, it emerged that the Securities and Exchange Commission (SEC) was mounting an investigation into price manipulations by certain unspecified “market operators” unbeknownst to the NSE and brokers. The SEC is due to call those accused for questioning on November 9, the organisation said in a statement, adding that it “would impose appropriate sanctions on erring operators found to have engaged in acts that have brought disrepute and erosion of investors’ confidence to the capital market”. Those accused of committing criminal acts will be reported to the Economic and Financial Crime Commission.

While the equity market has had a difficult year, investors have sought to move into the growing government bond sector, seen as a safe haven in uncertain times. Demand for government debt has soared through 2009. In the first nine months of the year, Federal Government of Nigeria (FGN) bond turnover totalled 13.31bn units worth N14.02trn ($93.2bn), more than doubling from 6.81m units and N6.82trn ($44.8) in the same period of 2008. Total bond turnover reached N1.9trn ($12.5bn) in September alone.

The bond market’s dynamism has increased pressure for the relaunch of a corporate bond market, which Nigeria has not had for two decades. With demand on the NSE still relatively low, bond issues would be an excellent way for companies to raise capital. Some reform of legislation would be necessary, though changes are already in the pipeline, including easing asset-allocation rules for pension funds, which would give them more scope to invest in highly rated bonds.

Given its past vulnerability to capital flight and financial sector instability, Nigeria’s capital markets have rebounded better than expected in the wake of the global crisis. Local press has reported increased bullishness in October, which could indicate rising positivity in the domestic and global economy. NSE officials have also noted the opportunities for value-buyers, and, with long-term growth prospects excellent, many companies’ shares are likely to appeal as recovery stocks at present. As the efforts of the well-respected CBN reinforce banking sector progress, confidence should return to the market, at least towards those institutions with a clean bill of health. Meanwhile, the bond market goes from strength to strength, but the process of reform, and the drive to cut out malpractice, is still far from over.

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