Friday, 26 January 2018

U.S. Economy Does Better Under Republicans or Democrats?

Conservatives (Republicans) often claim that their policies are good for the middle class. In “Presidents and U.S. Economy: An Econometric Exploration (PDF)”, authors Alan Blinder and Mark Watson compare the economic records of Republican and Democratic Presidential administrations focusing on the period after WW2. They find GDP tends to grow faster under Democratic presidents (avg. 4.33% p.a.) than Republican presidents (avg. 2.54% p.a.).

Some others have compared other areas impacted by Republican or Democratic presidents:

       i.          Inequality
         The middle and working class increasingly fall behind the richest Americans. Income growth  is faster and more equal under Democratic presidents and the chart below (by Harry Bartels) suggests this effect is driven by market conditioning and redistribution:

      ii.          Unemployment
     Possibly the single largest question for Americans is jobs. Douglas Hibbs finds that “unemployment rate was driven downward by Democratic administrations and upward by Republicans”. Bryan Dettrey and Harvey D. Palmer find “economic growth under Republican presidents has a stronger effect on stimulating stock market performance, while economic growth under Democratic presidents has a stronger effect on reducing unemployment”.

    iii.          Taxes
        In a recent book, “Welfare for the Wealthy”, Christopher Faricy shows that the rise of tax subsidies has effect on increasing inequality.

            Democrats favour tax credits while Republicans favour tax deductions which benefit the rich.

    iv.          Race
         People of colour make up an increasingly large share in middle and working class. Zoltan Hajnal and Jeremy Horowitz found that under Democratic presidents black poverty declined by 38.6% while it grew by 3% under Republicans.

The results of a broad range of studies are clear – progressive policies are better for economic growth, equitability, reducing unemployment and poverty. The arguments that conservative policies are beneficial to the working class are difficult to match-up with research done to date.

1. Tim Hyde, Why Does The Economy Do Better When Democrats Are In The White House?

2. Sean McElwee, These Five Charts Show The Economy Does Better Under Democratic Presidents

Friday, 19 January 2018

GDP Growth and Stock Market Return

It is common to say that the stock market return is underpinned by economic fundamentals.  The question then is: Is it appropriate to use GDP growth to predict stock market return?  To determine this, GDP growth data and Kuala Lumpur Composite Index (KLCI) annual return from 1994 – 2016 were collected for analysis.

Chart 1 is Malaysia’s GDP growth data taken from World Bank database.  Chart 2 is the yearly KLCI closing data taken from Yahoo Finance.

Chart 1: Malaysia’s GDP Growth 1994 – 2016

Chart 2: KLCI yearly data 1994 – 2017

The KLCI yearly closing index was processed to obtain the annual return data, then plotted together with the GDP growth data, as illustrated in Chart 3 below.

Chart 3

The orange curve is GDP growth while the blue curve is KLCI annual return.  The data shows that the KLCI is always moving ahead of GDP growth.  As such, a new chart was plotted by adding a one-year lag effect to KLCI yearly return data as shown in Chart 4.

Chart 4

From Chart 4, the relationship between GDP growth and stock market return is noticeable.  The stock market movement is influenced by the expectation of the economy rather than published data.  Thus, a reliable GDP growth forecast may be useful to predict stock market return.  Chart 5 is the regression plot between GDP growth and KLCI annual return with one-year lag effect.  Although the correlation is not particularly strong, it does suggest that 5% Malaysia’s GDP growth may move the KLCI by 7%.

Chart 5

Friday, 12 January 2018

Malaysian Green Sukuk Overview

In mid-2017, Malaysia launched its first green Islamic Sukuk (bond) to finance environmentally sustainable infrastructure project.

A Sukuk is an Islamic bond that can generate returns to investors without contravening Islamic shariah law, which prohibits interest. A Sukuk is a certificate, with proceeds used to purchase an asset that is mutually owned by both buyer and seller.

Green Sukuk is similar to conventional bonds in terms of seniority, rating, pricing and the execution process. The sole distinctive feature of a Green Sukuk is the use of proceeds, it must be used only for climate-friendly investments. This includes renewable energy generating facility, low-carbon transport such as rails, metros, trams, cable cars, electric or hybrid buses, and low-emission buildings for new construction.

   Picture source:

There are four types of Green Sukuk: -

               i.          Use-of-proceeds Sukuk: proceeds from the Sukuk is earmarked for green projects but are backed by the issuer’s entire balance sheet.

              ii.          Use-of-proceeds revenue Sukuk: proceeds are assigned to eligible green projects.

          iii.     Securitised Sukuk: the relevant revenue stream is generated by a group of green projects or assets.

              iv.          Project Sukuk: proceeds are invested in a specific green project and the investors have direct exposure to the green project itself.

Beyond the Green Sukuk, Malaysia has introduced several incentives to complement Sustainable & Responsible Investment (SRI) Sukuk framework and promote greater utilisation of Green Sukuk as a fundraising channel: -

                 i.          Tax deduction until year of assessment (YA) 2020 on issuance costs of SRI sukuk approved or authorised by or lodged with the SC;

                ii.          Tax incentives for green technology activities in energy, transportation, building, waste management and supporting services activities (; and

              iii.          Financing incentives under the Green Technology Financing Scheme (GTFS) with total fund allocation of RM5 billion until 2022 (

Malaysia’s first Green Sukuk was issued by Tadau Edra Energy for its 50MW solar project in Sabah. The RM250 million SRI Green sukuk has a AA3 rating, tenure of 2 to 16 years and profit rate between 4.8% to 6.2%.


Friday, 5 January 2018

Renewable Energy in Malaysia

Renewable energy (RE) such as solar, wind and hydro are getting more attention lately due to its environmental friendly nature.  The cumulative utility-scale (plant larger than 4MW) capacity of installed Solar Power hit 120GW on first half of 2017, see Diagram 1 for details.

Diagram 1. (source:

People may have the perception that the cost of renewable energy is high, and require government’s subsidy to make it feasible.  However, thanks to more recent technological advances, cost of renewable energy, especially solar, has come down significantly.   The solar power module cost is estimated to go as low as US$ 0.36/Watt (See Diagram 2 for details).

Diagram 2: (source:

This brings the average cost utility-scale solar plant to US$ 1.03/Watt (See Diagram 3 for details).

Diagram 3: (source:

Malaysia is targeting to generate 2,080 megawatts (MW) RE by 2020, which is about 4x from current installed capacity – 500MW.  Several incentive programs have been deployed to support the initiative such as Net Energy Metering, Large-Scale Solar, Green Sukuk Financing Scheme, tax incentive and Feed-in Tariff (FiT) mechanisms (Read more here).   With plenty of room to grow, lower cost and ample supporting programs, the prospect of RE sector in Malaysia is very attractive.