Euro 2012 Football Championship: Poland's Economy Scores

It's football season again. This round we have EURO 2012 Championship which will kick off on 8th June 2012. Are you ready? Before that, let us look at the championship from financial perspective. Don't care who will win the championship, Poland already emerged as the winner financially. Why?

The UEFA European Football Championship has taken place every 4 years since 1960. For the first time in history, Poland and Ukraine have scored the chance to co-host the Euro 2012 Football Championship. Despite high set-up costs for the two emerging economies, both countries are likely to experience long-term economic benefits.

The Statistic and Requirements:

• Estimated 670,000 football fans will pack into the new stadiums
• Around 1.5million spectators at fan zones only
• Minimum requirement capacity of 30,000 to 50,000 spectators for infrastructure and modern stadiums
• Sufficient parking possibilities, hospitality facilities, luxury hotels and training facilities was needed
• Required transportation infrastructure linking the host cities must be modern, well developed and meet UEFA's high quality expectations

Challenging Requirements Boost Economic Growth

As a result of the increased government spending, Poland's unemployment rate has improved significantly. In addition to modernization costs, safety costs of almost USD 1 billion will push the total bill for the event to over USD 10 billion in Poland's case. The majority of the modernization bill has been allocated to motorway construction to connect the hosting cities and surrounding countries.

Poland to Benefits from Euro 2012

The investment spending of over USD 10 billion will be beneficial for Poland, as long as the increase in GDP directly or indirectly allocated to the football championship tops the costs. Four main sources of possible additional income exist:

1. Extra spending by tourists and local population during the event
2. Extra spending generated after the event as a result of tourists visiting the host countries and cities
3. Benefits resulting from the upgrade of the various infrastructure programs
4. Benefits resulting from presenting the country and its economy in a positive light

Based on outcomes of earlier football championships, a study commissioned by the UEFA estimated extra spending during the event at around USD 300 million and USD 250 million thereafter. However, it is likely that, for emerging countries such as Poland, the benefits of major sporting events are much greater than for developed countries. While the publicity from major sport events is the same for developed and emerging economies, the marginal profit is expected to vary substantially. Developed economies are already well known as holiday and business destinations when hosting such events, but emerging countries may attract many more investors and tourists.

Long-Term Benefits for the Equity Market

Since very few major sporting events have been hosted by emerging market countries, the possible impact on the economy and on the stock market is difficult to estimate. However, it is likely that in addition to the attractive fundamentals of emerging markets such as high growth, low debt and favorable demographics, the access presented to a wide range of potential investors and tourists could give the country's economic development a significant boost and result in sustainable long-term growth perspectives. Poland and the Ukraine are likely very much aware of the possible long-term opportunities arising from hosting the UEFA European Football Championship this year and aim to create history together by hosting this major event.

Source: Credit Suisse

Why Gold Behave Differently this Round? (May 2012)

When market sentiment was bearish, equities market would slump, just like what we seen for past few days. Global markets suffered yet another blow due to the uncertainties surrounding EU, where Greece may potentially exit European Union. Would Greece finally exit EU? This is an interesting yet important questions for investors.

The headlines have been on the EU crisis recently, overshadowing the highly speculated Malaysia general election's date. Well, now would be a tough time for our Prime Minister to call on an election amid the gloomy global outlook. Maybe, the best time to hold an election already gone!!!

Anyway, another interesting issue was the slump in Gold prices. Curiously, many investors questioning the different trend for gold prices. Normally, it will spike up along with the risk level of global equities market, together with USD. Theoretically, gold and USD would over-perform other asset classes during bad times. Yes, USD had already appreciated against a basket of currencies for a record 12 straight days. However, bullion erased its 2012 gains this week while investors are reducing gold holdings for a 3rd month, the longest stretch since 2004.

So, which is the Safe Heaven now?

Based on that fact, it seems like USD is the only safe heaven asset class that investors trusted now. Frankly speaking, Finance Malaysia don't know why gold behave differently this round. Anyway, we came out with the following potential explanations:

1. Actually, we really don't know how to value gold. Is it expensive or cheap? There is no benchmark on gold prices. Because of that, gold price tends to be speculative in nature. Currently, hedge funds are the least bullish on metal since December 2008, and they are the one who drove up gold prices. Is this the time for them to take-profit?
   
   
2. While there is no benchmark for gold, the strength of USD was based on US economy. We can't deny that US is recovering now, amid at a slow pace. Also, without QE3, why USD should stay low? With that reason, investors might chose USD than gold, as the potential is greater.
   
   
3. Please don't forget that many European governments had the greatest gold holdings in the world. For sure, ECB needs to pump in more liquidity into market. Where does the money comes from? When you're holding many gold and you need money, what would you do? Of course, cash in by selling your golds.

Even said so, many analysts are predicting a rebound for bullion. While RBS, ABN Amro and Barclays cut their gold forecast in May, Goldman expects prices to rise by 25% to $1,940 an ounce in 12 months. Billionaire investors, George Soros is favoring gold and he may gave gold investors the confidence. Good Luck.

Who can Save GREECE? (Feb 2012)

It's the time again for Greece to convince its counterparts that they are serious in cutting budget deficits. By doing so, Greece was to put on the lifeline (bailout) by European Union (EU) once again. The discussion of whether to save or not to save Greece had been dragging for one week time now. Why?

In Chinese, we say "we cannot see people die by not lending our hand". That's why China said they will help when the time arrives. The question is when is the right time? Until Greece go bankrupt? Or,  until Greece left EU?

Who can save Greece?

The answer to this very important question is very obvious. In Christian, they always emphasize on "we should take responsibilities on what we did", right? So, the solution lies in Greece hands. Not the country, but, the citizen, the people of Greece. It's time for them to come back to reality. Let's take Malaysia as a benchmark, they are working fewer hours than us, yet they are earning much better than us. GDP per capita of Greece is more than twice of our figures. How are they going to sustain whatever they are having now, such as attractive pension scheme and healthcare?

Technically, Greece already bankrupt with Debt to GDP of over 140. What does this mean? For every RM1 they earn, they spent RM1.40. It's overspent, it's over leveraged. It's time for Greece to unite together, shoulder the responsibilities with their Government, by taking pay cut, reform the pension scheme and healthcare system. By doing so, then only Greece can come out from debt crisis. Although the period is difficult, they must did it, don't procrastinate anymore. The longer they drag, the debt may snowball until a stage where "too big to burst".

Finance Malaysia really hopes Greece can come out of the bad times by themselves proudly. This goes to Italy, Belgium, Ireland, and Portugal too. We shall support Greece by visiting the beautiful country (of course, until all the riots were end).

The end of Europe’s liquidity crisis? (Dec 2011)

Well, many people already bored with the on-going Europe debt crisis, and subsequently liquidity crisis. This is like what we have seen in 2008 when Lehman Brothers collapses, which drags down the whole financial systems globally through liquidity crisis. The different is between company and country. Maybe some of us doesn't know how this chain effects rattles the global markets. So, let us start here.

The European Organisation chart of Debts

The root of the problem plaguing the market right now is Europe debt crisis, where Greece and few other European countries were highly in debts. They just simply cannot generate enough revenue (taxes) to support the economy itself. So, they resorted to seek for funding via borrowing by issuing sovereign bonds to finance their day to day operations. However, the debt is piling up intensively after 2008 global financial crisis until recently. Because the government does not have money, their bonds may go into default. So, they were forced to borrow some more, but with higher interest this round.

For them, this kind of measures are simply to prolong the problems and those debts were still there charging higher and higher interest. They are buying time, hoping their economies will survive and growing in the future to repay back whatever they borrow now. What a pretty picture?

Who is the main borrower?

Congratulations, the winners go to French banks. They are the main source of funding for these troubled ladden countries. As long as these banks charges those countries interests, everything is good for banks but bad for countries. What if those countries really go bankrupt? French banks may follow suits too.

So, the pretty solution is to write-off from the book of borrowers (French banks). Why French banks still need to accept the offer? Depending on the % of write-off, banks at least got something better than nothing. Right?

How the liquidity problem set in?

Debt writing-down means that the assets of French banks were being slashed. Last month, there is a 50% hair-cut for Greek debts and the amount will reflects in the books of these banks in the next few quarters. Now, you know why rating agencies are cutting 15 European banks' rating last week?

Sigh... But, not yet ends?

After the hair-cut, banks may having liquidity issues next. They doesn't have enough capital to borrow and this may dampened the whole financial system, thus, businesses and public facing difficulties to finance their expansion or consumption. Don't worry, angels were always by our side.

Angels (not Santa) come before Xmas...

Last week, 6 central banks globally take an important step toward dealing with the problems in Europe by pledging to continue provide funding to global banks (especially European banks). These angels are US Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. They would lower the pricing on US dollar liquidity swap arrangements effectively easing the liquidity problems faced by European banks.

This action dissolves one of the stumbling blocks in global financial system. Risk plays a role when one bank lends to another. In the current environment, banks likely don't believe that they are being compensated enough for the risks they face by lending out. With the dollar swap lines, banks can instead go to their central banks for short-term loans, provided that they have good collateral. Win-win situations? Yup. I think so because one can solve the liquidity problem, while US successfully creates a huge demand for its sliding currency.

Why GOLD is a different asset class?

Today, gold is becoming an ever important asset class in the world. Banks nationwide is offering investors the opportunity to invest in gold, whether it is for capital preservation or capital gain. How well you diversify without investing in gold? This is the question being asked by those already investing in gold, and most of them already making profit out of it. But, is it really so different? Is it really a must have asset class?

History of Gold

Gold has been used for numerous monetary functions long long time ago, especially in China. Ancient people used gold as a form of currency and storage of wealth. By using gold as a medium to which paper currency was pegged, most modern international monetary systems were created since then.

What drives up Gold price?

The modern gold rush scenario happened since 2008 global financial crisis, driven by extremely low deposits rate on cash, very volatile equity markets and surging inflation. Negative real value of money is the key factor why many people rushing to gold since then. And of course, the wealth generated by India and China sparked the demand for gold too. Both Indians and Chinese are buying gold as a status they long-been dreaming of.

More people are flocking to Gold

Because of the bad loss-making experience in equity investments during 2008 financial crisis, investors exited the capital markets and were holding record amounts of cash then. However, the low yields on cash and other safer instruments left investors searching for better yield elsewhere. Low volatility, safe asset class, and storage of wealth naturally makes gold investment popular. This is when "Gold rush" sets in, with or without your attention. Yes, we're in the midst of gold rush currently and could persist for few years more.

Emerging Markets is the main drivers

In 2010, 54% of total global demand for gold were for the purposes of making jewelry. Who are these rich people? Yup, Asians were the regular jewelry supporters. Indian demand alone was responsible for around 1/3 of total global demand. This trend is expected to continue as more Indians make their way into the middle class and have the ability to spend their income on gold jewelry.

Following closely was Chinese, whom is beginning to display a trend that could see it overtake the ultimate title in the near future. Traditionally, Chinese cannot runaway from buying gold during Chinese New Year, marriages, new born or even birthdays. This reasons ensure the sustainability of Chinese demand for gold. In total, 40% of global jewelry demand is contributed by Indians and Chinese.

China is the largest gold producing country?

Despite record high gold prices, total mine production was fairly unchanged and remain below levels seen earlier in the decade. This was due to rising production costs and tighter legislation in certain gold producing countries. The latest was in Peru, where protesters were staging a rally for past few days against environment damaged resulted from gold mining activities there.

South Africa, once the largest gold producing country, was overtaken by China since 2007. Hence, China is going to dominate both demand and supply of gold and is expected to continue its pattern of growth going forward.

US and Western Central Banks are largest gold holders?

To re-balance currency reserves, liquidation of gold by central banks globally was a routine procedure. Despite the fact that most western central banks are, for all effects and purposes, over-allocated to gold, annual sales trends began to gradually slow as the effects of financial crisis is not over yet. Obviously, European Central Banks (ECB), have been very hesitant to sell gold from their external reserves back into the marketplace because they view gold as a currency proxy and a way to diversify their holdings. European, from banks to people, prefer to hold gold rather than currency at risk of continue devaluation.

Meanwhile, Emerging countries with particularly small gold holdings as a percentage of reserves currently are diversifying from US dollars. Instead, emerging economies are regular buyers of gold now. As these economies continue its speed to grow bigger, a paradigm shift appears to be unavoidable.

The above factors explained why gold is a different asset class. We cannot simply read the historical trends and using technical analysis tools to predict the gold price directions. Yet, we invest into gold to protect and create wealth, amid the looming economy crisis.

Why Gold Price DROPs lately? (Oct 2011)

During market uncertainties, there are two popular safe assets which is Gold and USD. This explain why the demand for these two assets is great, resulting them to become more valuable while equity market fell. We experienced the said scenario recently and let's see the chart below to gauge the Gold price movements.

"Gold prices collapsed from their August highs in September amid a broad commodity sell-off and despite intensifying concerns over sovereign debt issues in Europe. After exhibiting a remarkable correlation to real rates this year, particularly during the swift August rally, the sharp pullback in gold prices occurred with real rates mostly unchanged."

"Gold prices have now fallen back in line with our 3-month price target. As we expect gold prices will continue to be driven in large measure by the evolution of US real interest rates and with our US economic outlook pointing for continued low levels of US real rates in 2012, we continue to recommend long trading positions in gold and reiterate our 12-month price target of $1,860/toz", reported Goldman Sachs.

Why is it different this round?

Supposedly, gold prices should move in-line with USD. But, we see USD strengthening to months high while gold prices faced some setbacks lately. We at Finance Malaysia would like to guess the off-the-screen factors such as...

First, who is holding the most gold?

Second, who is in dire needs to sell gold reserves?

Of course, European countries (highlighted in yellow)

Now, you know why gold prices behave differently? Ha...ah. We are not surprise by the sell-down (if any), given the high valuations gold fetches when it recorded all-time high almost every days until $1,900/toz. Does Gold more important than cash right now? Yes for China, No for Europe.

RHB: Market Outlook & Strategy 4Q2011

Titled "Perilous Crossroads; Challenging Times Ahead" RHB Research painted a not so rosy 4Q2011 outlook for KLCI. Undeniably, our market are in for a turbulent times and we do not know how the year will be ended. Bear or Bull market?

Below is the excerpt from the said report:

~ The US economic recovery has slowed to a crawl, while Europe is not just lurching from one crisis to another, it is lurching into a new one before the previous one is solved. There is growing risk that sustained weak confidence could exert downward pressure on demand and business activity worldwide.

~ Nevertheless, "double-dip" recession can still be avoided if political leaders get their acts together fast enough to contain the debt crises and avert a contagion given that global trade has not fallen off the cliff.

~ On the home front, we expect the Government to speed up the implementation of the Economic Transformation Programme, which coupled with resilient consumer spending, will provide some cushion to the weak external demand for the country's exports.

~ RHB has revised down our 2012's economic growth projection to 3.6% from 4.5% previously and compared with +4.3% estimated for 2011.

~ With a still cloudy global economic outlook, we believe it is still too early to "bottom fish" at this stage. As global headwinds remain strong and situations could get worse, we will continue to advocate a defensive investment strategy for investors.

~ Under such circumstances, we are of the view that high dividend yielding stocks with reasonably good growth potential would be more resilient and will likely outperform the overall market.

Western Debt Crisis: Bursting of Volcano? (Sept 2011)

We cannot deny that we are in for another round of hard times since 2008 global financial crisis. Some experts are saying that we are facing the Great Depression wave coming in the next few months, if no concrete efforts put in by global leaders. Meanwhile, some experts think that opportunities arises again and put off the double-dip recession speculation.

The downgrading of US's AAA rating re-ignite the fears over the sustainability of its sovereign debt. However, please be mindful that US rating remains extremely sound and reflecting a very low risk of default in the long term, still. USD remain the preferred and most widely traded currency in the foreseeable future, and there is no reason to worry about.

Sovereign Risk scaring investors away?

Meanwhile, in Eurozone, the situation remains very complex and greater political will is needed to maintain Euro as regional currency. Between Eurozone breaking up and resolving the situation, which one is easier? Of course, the economic and financial cost of the Eurozone breaking up seems far higher.

Undoubtedly, the "Volcano" is active again now and may burst anytime from now. Unless, we poured ice on it to prevent the crisis. Sorry, we needs ICE-BERG (great efforts) to get through it. Otherwise, we may just let it burst, and start all over again. Not a bad idea though, right?

I can say it that way because I am living in Asia right now. Luckily, Asia is much more resilient comparing to its western friends, partly due to the 1997 Asia financial crisis which make our banking system strong and pro-active now. Our lessons were being taught to western countries this round. Hopefully, they know the root of the problem and tackles it painfully.

J.P. Morgan's Equity Strategy (Sept 2011)

On Sept 7, J.P.Morgan came out a report titled "Global Markets Outlook and Strategy". Here, we would like to share the equity strategy written, which we think is the most sought after reference for investors to strategize during this uncertain times. Below is the excerpt from the said report:

"We believe perceptions of a US recession will continue to weigh on equity markets and we thus keep a low amount of risk in our equity portfolio and reduce beta to negative."

"The most likely positive catalyst for equity markets in the near term lies with US economic data. This is not happening yet. Our US Economic Activity Surprises Index remains in negative territory, where it has been for 5 straight months (Chart 1). We need to see this index moving to positive territory, and US economic data surprising on the upside, for equity markets to sustain a recovery."

2 reasons why Under-performance

The August market slump saw emerging market (EM) equities and small caps under-performing, exhibiting their traditional high beta during recessions or crises. There are 2 reasons for this under-performance.

1. During expansion and market rally phase, investors became overweight the assets with the highest beta. The economic turnaround then forces them to get back to neutral, inducing more selling in EM and small caps.
2. Small caps and EM are both less liquid markets, amplifying the impact of a given amount of selling. This happened even in periods when the crisis emanated clearly from developed markets and not from EM. The beta, position, and liquidity forces dominated the source of the crisis in driving relative performance.

The Strategies...

Rule-based trading strategies tend to perform better in highly uncertain environments. We take more risk on these strategies:

• A US equity sector trading model based on a combination of sector short interest, a contrarian indicator and 11-month return momentum suggests staying long in Energy and Materials vs. Financials and Staples.
• Our Cyclical vs. Defensive global sector trading signal based on the monthly change in global PMI is currently recommending an UW in Cyclical vs. Defensive sectors.
• Our EM vs. DM equity signals based on relative IP growth and 2-month return momentum are currently neutral in EM vs. DM equities
• Our model for allocating between the US and Euro area equities currently suggests a long in US vs Euro area equities currently hedged

Why chose ASEAN economies vs. China?

• ASEAN countries are in a sweet spot with inflation below the central bank target zone, strong currencies and healthy growth. Emerging markets for now are a non-BRIC story.
• We see a high risk of disappointment in China. The consensus view is that growth is the priority. But with wage inflation signaling healthy employment conditions and public concern about the rising cost of living we see a high risk that policymakers focus on price stability rather than growth.
• China's 2Q fixed asset investment (FAI) to GDP ratio was 53%. The re-acceleration in 2H11 growth is based on affordable housing and FAI projects. The result is FAI to GDP above 60%, a level that could result in more overheating.

UW: Underweight

OW: Overweight

Special Coverage: Web of Europe’s Crisis

$1 trillion rescue package by European Union.
Global share markets reacting positively towards EU latest move.
Euro gains 2.7% in one day boosted by EU and IMF.
European markets posted best one day gain this year.

Sounds GOOD?

This is the power of UNITY showed by EU countries during this round of financial meltdown. After a frantic talk on Monday, European officials agreed the 16 euro nations would put up $572 billion in new loans and $78 billion under an existing lending program. Meanwhile, IMF will pump in another $325 billion, adding up to a rescue package of nearly $1 trillion.

However, many economists and analysts are still concern as to how the money would be dispensed and on what terms. A lot of them citing the euro rescue won’t solve the main problems plaguing the economies of Greece, Spain, Portugal, Ireland and Italy, which is low growth and weak balance sheets.

Let’s enlarge the chart below (you must) to have a clear picture of the debt-ridden countries, taken from www.nytimes.com

Now, you still believe that EU nations are really so UNITED?

The reality is that the Germans, French and the rest of Europe have little choice, but to bail out the troubled members to prevent them from failing. With cross-border banking and borrowing, many countries on the periphery of Europe owe vast sums to one another, as well as to richer neighbors like Germany and France. A default by a single nation would send other countries tumbling.

Who is the “Tai-Ko” (number 1)?
Congratulations to GREECE, who owes:

• $9.7 billion to Portugal
• $8.5 billion to Ireland
• $6.9 billion to Italy

Second layer of Debt:
Portugal owes $86 billion to Spain.
Nearly 1/3 of Portugal’s debt is held by Spain.
With unemployment at 20%, Spain is among the weakest economy in Europe.

And, Spain owes:

• $31 billion to Italy
• $30 billion to Ireland
• $28 billion to Portugal

Third layer of Debt:
Collectively, these PIIGS owes:

• $704 billion to Germany
• $911 billion to France
• $418 billion to Britain (Here’s how Britain also came into picture)

Interestingly, Italy owes France $511 billion, or 20% of French GDP!!!
Now, I am not surprise that “French fries Italy’s Pizza”…

Conclusion: German and France are FORCED to bail out PIIGS.

Focus of the Week: GREECE crisis – World wide version

With Greece having trouble, it is now pulling other assets too:

• US Dow Jones plunged as much as 9% on Thursday before recovering to end 3% down.
• MSCI’s emerging markets index lost 11% since mid-April.
• Crude oil price has fallen 14% over the past week, with Greek crisis putting the brakes on speculators as well as fears for Chinese growth.
• Commodities indexes have lost 5% in a week.

The question in all investors mind this week would be:

When would this stopped?

 

To contain the infections, Euro zone leaders decided on Friday they have special measures ready before financial markets open on Monday to prevent financial turmoil in Greece spreading to other countries such as Spain and Portugal.

 

However, European Commission President Jose Manuel Barroso declined to give any details of the proposals, which will be presented to all 27 EU finance ministers for approval on Sunday.

 

 

The EU summit, called to discuss longer-term efforts to coordinate economic policies, turned into a crisis-management session, with the euro facing its stiffest test since its debut in 1999.

 

High deficits coupled with low economic growth has threaten Portugal, Spain and Ireland to follow the crisis leading path of Greece, most probably forcing them to seek financial aid too.

 

“People worry that if Greece is Bear Stearns, Portugal is Lehman and Spain AIG”. BNP Paribas said during past week, a phrase that gained much circulation last week.

PIIGS (Portugal, Italy, Ireland, Greece, and Spain) can’t fly – the Greece problem. An article by Tan Sri Lin See-Yan saying that these countries need to seek IMF help before it was too late.

 

Hopefully, the share markets around the world would stop falling as intended by EU. 

Economy: Cash Greets Greece

After months of speculations and rounds of discussions, all the European Stars reunite at last, as shown in EU flag. On 12th April 2010, the euro zone nations have agreed on a Euro30 billion rescue package for their heavily-indebted partner - Greece. The finance ministers of the 16 European Union nations, who have euro as their common currency, finalized the details of their bail out plan for Greece.

The annoucement comes amid mounting concern in the financial markets about the cash strapped Greek government's ability to service its staggering debts of more than Euro400 billion, thus, pulling down euro to very low level recently.

How was the package like?

Under the package, it will cover a 3-year fixed 5% interest loan and the amount of the loan could be increased over the next 12 months. The European loan is likely to be shared proportionally based on the breakdown of the ECB's capital. The IMF will complete the plan with a Euro15 billion loan at an adjustable rate based on the special drawing rights rate.

Yield falls...

The yield on the country's 12-month T-bill plummeted to 5.28%, suggesting the threat of a near-term default had been lifted. Today, Greece is going to auction Euro1.2 billion T-bills, which is now deemed as "Zero-Default Risk". Wow!!!

Uncertainties remain...

Although the emergency aid fund may reassure investors and make them more willing to continue buying Greek bonds, uncertainties remain over the long-term prospects for reducing Greece's debt mountain, which have dented confidence in the euro.

The Greek official said the government would decide within a few days whether to ask for the aid, depending on whether market interest rate would subside. Anyway, 5% interest bearing loan provided, is well below current market rates of about 7.3%. Assistance for subsequent years would be decided later.

What's next?

Over the next 2 years, Greek economic activity is likely to continue to decline. Euro is expected to appreciate with French and German bonds yield to increase slightly. I think that UK could be the next concern for the market.

Source: BNP paribas, Reuters, WorldNews, Bloomberg