Friday, 23 February 2018

Why Is the Dollar Weak?

About two weeks ago someone wanted to know why is the dollar weak? I honestly didn’t explore the reasons. So, I just said “it could be a Trump administration thing, trade deficit, ballooning budget deficit and some other speculative factors”.

Rate rises by a central bank traditionally boost a currency. And the Federal Reserve has raised interest rates three times in 2017. The ICE dollar index which measures the dollar against a basket of six other currencies fell nearly 10% in 2017.

A big part of dollar’s decline in 2017 was the Euro’s strength. While the dollar has not reacted much to the passing of U.S. tax reform, theoretically it should boost the value of the dollar. The main factors that may have contributed to U.S. dollar weakness in 2017 include:

       i.          Acceleration of global growth with anaemic U.S. growth of 2%;
      ii.          Monetary policy stance of other key central bankers;
    iii.          Diminishing political risks in the Eurozone;
    iv.          Uncertainties of Trump administration policies on infrastructure, DACA, immigration and the like; and
      v.          Heightened geopolitical risk since Trump assumed office.

So the U.S. currency is set for another soft or “soggy’ year despite Federal Reserve’s tightening interest rate regime for up to four times in the next nine months. The U.S. has neither the current account surplus nor budget surplus to be a true safe haven. The Eurozone, on the other hand, has a huge current account surplus and the characteristics of a safe haven. So dollar weakness will stay for 2018 if it lifts value of foreign sales and profits for U.S. multinationals.

1. “The US dollar just had its worst year in more than a decade, and 2018 will bring more of the same” (
2. “A weakening bias for the US dollar well in to 2018” (

Friday, 16 February 2018

Davos: Donate or Tax?

The “elite” at the recent World Economic Forum in Davos considered a novel “old” cure: Wealth redistribution for decreasing income inequality. Is this voluntary or through taxation?

The Brexit vote, Donald Trump and nationalist sentiments from Europe to China have put income inequality on a higher plane at Davos. Oxfam, an international confederation of charitable organisations, with focus on alleviating global poverty reported “8 men in the world have the same wealth as 3.6 billion of the world’s poorest people”. In 2017, the richest 1% held 82% of all wealth created. Billionaires gained USD762 billion in 2017. “Something is very wrong with the global economy”, says Mark Goldring of Oxfam. “The concentration of extreme wealth at the top is not a sign of a thriving economy but a symptom of a system that is failing the millions of hard-working people on poverty wages”.

“We must rebalance this unjust economy” said Winnie Byanyima, Executive Director, Oxfam International. This was echoed by Oxford academic Ian Goldwin. But how do we get equality? Oxfam reports that the USD762 billion that went to the richest 1% could have solved world poverty. Not once. Not twice. But SEVEN times over. But instead, that USD762 billion went to making the richest 1% just that much richer. Walter Scheidel in his book “The Great Leveller: Violence and the History of Inequality from Stone Age to the Twenty-first Century” argues that there are a couple of ways:

       i.          complete collapse of states and economic systems;
      ii.          epidemics and pandemics; and
    iii.          a world war

We don’t need any of the above if we have states willing to tax the “super-rich” to pay for the “super-poor” on basics – food, shelter, education, employment and health. Without a tax system will they voluntarily donate? Unlikely! But a system that benefits 8 or 42 individuals cannot be sustained indefinitely and will definitely lead to collapse or war.

1. “A report that beggars belief”, Jason Godfrey,
2. “Davos Leaders agree: share more wealth, or face the consequences”, Peter Vanham, 2018 World Economic Forum

Friday, 9 February 2018

Top 9 Valuation Mistakes

Equity valuation is an important topic in finance.  Investors perform valuation on companies to determine whether the companies are reasonably priced.  Thus, investors shall minimize the mistakes in their valuation to maximize their investment return.

Andrew Stotz, CFA, President of CFA Society Thailand, outlined the top nine valuation mistakes in his recent presentation during an event organized by Securities Industry Development Corporation (SIDC) and CFA Society Malaysia.  The top nine mistakes are: -

  1. Overly optimistic revenue forecasts;
  2. Underestimating expenses causing unrealistic profit;
  3. Growing fixed assets slower than revenue;
  4. Confusing growth with maintenance Capex;
  5. Forecasting drastic changes in cash conversion cycle;
  6. Underestimating working capital investment;
  7. Valuing a stock using the calculated Beta;
  8. Choosing an unreasonable cost of equity; and
  9. Not properly fading return on invested capital.

He also suggested the following steps to avoid making those mistakes.

  1. Curb your enthusiasm on revenue forecasting;
  2. Reduce focus to only Cost of Goods Sold and Selling General & Admin costs;
  3. Over the long-run companies should grow fixed assets about as fast as revenue;
  4. CAPEX consists of maintenance CAPEX and growth CAPEX; Maintenance CAPEX is the minimum and should be roughly the same as depreciation;
  5. Avoid huge changes in working capital items, except in rare cases where there are changes in product mix or management policy;  
  6. Unlike in accounting, in valuation we exclude cash and short term borrowing from net working capital;
  7. Beta shall be in the range of 0.7x to 1.25x;
  8. Based on our study we consider COE ranging between 8% and 12.5% to be reasonable; and
  9. Fade highly profitable firms to 20% premium to WACC, unprofitable firms to 20% discount and no fading is required for average ROIC firms.

Investors who are interested to learn more about Andrew Stotz’s valuation technique can visit his website for more info.

Additional notes from Andrew on point no. 9 - 

"Many analysts make the mistake of forecasting that highly profitable companies will maintain that profitability for a long time. And that low profitability companies will maintain that low profitability for a long time too. But our work on this concept shows that very high ROIC fades down over about 3.5 years, low fades up over about the same amount of time. In both cases, they don't fade to average, but close to average. So to answer the question, in about Fading ROIC is done by the analyst reducing the company's operating profit (somewhat similar to net profit) forecast relative to their invested capital (somewhat similar to total assets) forecast."

Sources: Stotz, Andrew and Lu, Wei, Financial Analysts Were Only Wrong by 25% (2015)

Friday, 2 February 2018

“Nasi Lemak” Graduates: Who Is To Blame?

Is there anything inherently wrong about a graduate selling nasi lemak? No! But the cost borne by society or Government is what is tragically wrong. There is a cost for every graduate be it diploma, degree or post-graduate. According to Higher Education Minister, graduate unemployment is highest in business administration, applied science, human resource management, accounting, arts and social sciences. There is no need for titration, trigonometry or quantum physics to end up selling nasi lemak.

We should be alarmed as a society. Bank Negara Malaysia (BNM) in its Annual Report 2016 had an excellent article on “Youth Unemployment in Malaysia: Developments and Policy Considerations”. According to BNM, the youth unemployment rate in Malaysia was estimated at 10.7% for 2015, three times the national rate.

Among 15-24 year olds, only 16% have tertiary education while the remaining 84% have secondary education. Among those in tertiary education, unemployment is higher at 15.3%. Job creation in the Malaysian economy has remained concentrated in the low and mid-skilled jobs. Domestic industries stay in low value-added activities that look for cheap labour – so foreign labour is more readily engaged.

In terms of earnings, 54% of graduates earn less than RM2,000 a month. Starting salaries for graduates have been stagnant since 2007.

Employers continue to cite significant skill gaps among new recruits. A survey by World Bank and Talent Corporation found 90% of companies believe graduates should have more industrial training before they graduate. And 81% of companies surveyed rate communication skills as a major deficit among graduates. Root cause – the national education system.

A study by Global Entrepreneurship Monitor (GEM) categorized Malaysia as an efficiency driven economy, well behind innovation driven economies. Malaysia focuses on improving existing processes, not in inventing new things. The number of researchers in Malaysia for each one million population is only 365, behind Japan’s 5,416 and South Korea’s 4,321.

We need meaningful strategies to transform the national education system, empower universities to develop technology and communication savvy graduates. The Malaysian Education Blueprint (2015-2025) outlines this – another excellent piece but limited in its execution.

Meanwhile, what could we do? There are 40 super rich Malaysians who raked in 22% of the country’s GDP (2013 Malaysia Human Development Report, U.N.). With GDP at USD300 billion, that works to about USD66 billion or RM264 billion. A “voluntary” super tax of 2% will generate RM5.2 billion annually for short-term programmes for graduates:

       i.          Teach Malaysia (already in existence);
     ii.          Train Malaysia;
    iii.          Research Malaysia;
    iv.          Medic Malaysia; and many more could be created.

And these are all not-for-profit organisations.

Isn’t it better for a medical graduate to work in a support/aid programme over two years before he/she gets a permanent posting? Isn’t it better for a science graduate to work on new inventions? Isn’t it better for an engineering graduate to help SMEs to a higher level? Or, an economics graduate to look at marketing for a company? The possibilities are immense! Not just nasi lemak.

And who is to blame for this malaise? We should take the blame – the Government, tax payers, the universities, the parents – for young talents to be “wasted” in a mismatch not of their doing. (I think I now need a nasi lemak!)

1. Youth Unemployment in Malaysia: Developments and Policy Considerations by Dian Hikmah Mohd Ibrahim and Mohd Zaidi Mahyuddin.

2. Oxfam Report: Ill with Inequality-by Mangai Balasegaram in The Star, 28 January 2018.