Brent Crude Oil Technical Chart

After a two-year rally from 2016, the Brent crude oil is on a losing streak since beginning of October 2018 (Chart 1).  It has plunged about 30% from USD86 per barrel to USD59 per barrel (26 Nov 2018).  What sparked the sell-off?

From technical chart perspective, the MACD divergence was observed since June 2018 (Chart 2).  It formed the deadly cross on 22 Oct 2018 and triggered the sell-off confirmation signal (see pink arrow).  At the range of USD55 to USD60, it may find a breather as there are few support lines.  If the price could not hold up well at this range, further downside may be foreseen in near term.

Chart 1. Brent Crude Oil Weekly Chart 2007 - 2018

Chart 2. Brent Crude Oil Weekly Chart 2013 - 2018

Fintech in Banking

Artificial Intelligence (“AI”) had a significant impact on the banking sector in 2017. There is basic AI and industry AI. Basic AI is integrated into application systems such as facial or speech recognition. Industry AI has application in anti-fraud, robo-advice and so forth. Currently, mainstream AI technology is data driven machine intelligence. Application of AI can be divided into three phases:

Application of Artificial Intelligence

The first stage is business automation – replace repetitive work with AI. Big data intelligence is the next stage. The third stage is to fulfil all-channel intelligent decision making and updating optimization through customer response.

In recent years, big data has been widely used in several areas of banking. Progressing from data analysis reports to data mining models to data products. Customer and product profiles provide continuous input to modelling process. As a result, there is improved customer perception, more intelligent algorithms and faster decision support. Banks can only develop a global perspective by building their foundation on big data.

Reference:

The Future of Fintech in Banking, Tian Jiang, CFA, Fintech 2018 Report, CFA Institute

Why Theresa May’s Brexit Deal is Bad?

According to the National Institute for Economic and Social Research (“NIESR”) in the U.K, the deal with the European Union (“EU”) would hit the U.K economy to the tune of £100 billion a year by 2030.  The overall value of the economy will shrink by 3.9% by 2030 compared to staying in the EU.  However, Mrs. May has issued the threat that failure to pass the deal is “more division and more uncertainty”.

The NISESR sees fresh barriers to trade for Britain without any benefits enjoyed by Norway or Switzerland.  Both these countries have accepted free movement of people – a redline for Britain.  According to NISESR, total trade between U.K and EU will fall by 46% by 2030 with FDI also taking a 21% hit.  There is an expected £18 – 23 billion drop in public finance because of a drop in tax revenue.  The key finding of this think tank is that U.K GDP will be 4% lower than if it has stayed in the EU.  Higher impediments to services will make it less attractive to sell services from the U.K.

According to EU, if the U.K wants frictionless trade with the EU then it must remain in the Single Market and Customs Union.  This means accepting freedom of movement of people, respecting EU law in matters of trade deals with third countries or blocs that confer an unfair advantage to the U.K over the EU.

The present Withdrawal Agreement is buying time at the cost of a considerably weaker negotiating position for the U.K in respect of its future trade arrangements.  All roads now seem to point to a second referendum or a General Election.

This Photo by Unknown Author is licensed under CC BY-ND

How Do You Quantify a Fabulous View?

A house with a fabulous view can be hard for a home buyer to resist.  It may be the distant mountains, or a lake, or the city lights seen from the living area of a home.  There is a price, but the hazy part is figuring out what is the added value.

Estate appraisers and analysts may help but there is no simple answer.  Andy Krause, a real estate data scientist at Greenfield Advisors in the U.S. did some work on this: “It’s somewhat subjective” he says.  What makes a better view?  All views are not equal or valuable and a view from one location may not be the same with another.  For example, a view in KL Sentral condominium (“condo”) that overlooks a green space may cost more than that faces another condo unit of another block.

In Malaysia, we have guidelines on development but invariably these are compromised for various reasons – especially under the previous government.  What if you purchase a house in a low density environment and suddenly there is a high-density condo development (40 stories up) next to you?  Imagine people looking through your window, or into your garden?  A view of greenery or secondary forest is now turned into two concrete blocks (40 stories)!  This happens in Bangsar, Damansara or other parts of Kuala Lumpur.  How do you determine a fair compensation?  If you try to stop the development, the “powers that be” will tell you don’t waste your time and money.  The developer is well connected to MO1.

So how do you price different scenic views for compensation?  Krause who builds automated valuation models estimated five (5) different types of view (for Seattle):

       i.          add 5% to 10% (of existing value of comparable house) for a house on flat ground with an unobstructed view of an open space or park.

      ii.          add 10% to 30%, for a house partially up on a hill with an unobstructed view.

     iii.          30% to 50%, same as (ii) but perhaps you have a lake view.

     iv.          add 50% to 75%, where the house is on a hill with unobstructed cityscape or open vista.

      v.          75% - 100%, where there is a stunning view of the ocean or a big lake.

A view can be one of the most attractive aspects of a house.  You may have paid a price for a scenery that you and your family had hoped to enjoy.  Then comes a developer and lax regulations that obstructs your view, surely the developer and/ or condo purchasers now have to pay a fair compensation to you?

Reference:

Love That House’s View? By Marilyn Lewis, April 4, 2018, nerdwallet.com

Hot Deals for Monday WW48'2018

Welcome to Hot Deals for Monday, where you have opportunities to Buy or Sell!

Opportunity 1

Marketing and retail footwear looking for new investors to acquire 20% stake in company.  Consistent dividends of 5% or more for over 5 years.

Opportunity 2

Company dealing in outdoor and gym equipment, has been in business for 15 years.  NTA around RM7.5 mil.  Profit ranging from RM0.5 mil – RM1.0 mil.  Profit guarantee is feasible.  Offering price RM5.0 mil.

Opportunity 3

“Edupreneurship” opportunity!  An established education provider is offering an exceptional opportunity to grow entrepreneurs in higher education field.  The potential “edupreneur” will be given the chance to manage a college by taking a minor equity position (40%) in the education group for RM2.0 mil, with an option to buy-out the company later.

Opportunity 4

A European company is looking to acquire or JV with beverages company (including water or milk players) in Malaysia, Myanmar or China.

Opportunity 5

Sale of Software & IT business with revenues of over RM100 million and net income in the range of RM1.5 - 2.0 million.  Controlling stake (approx. 70%) is available.

Opportunity 6

Buyer looking for power plant (100MW and above) in Malaysia, Myanmar, Laos, Vietnam and Indonesia.

If you are interested in the above opportunities or would like to offer your hot deals, please contact info@mpcap.com.my or 603 - 2283 1170 for further details!

Potential Loophole in Cryptocurrency Trading

Potential Loophole in Cryptocurrency Trading?  Hope you enjoy the video!

                                                              This Photo by Unknown Author is licensed under CC BY

Independent Spirit: Corporate Finance Advisory Firms

In the U.K. M&A activities hit £375 billion in 2017 (ICAEW Issue 205 Sep 2018).  The main areas were in IPOs, growth-capital deals, debt advising and transaction services.  All generating fees.  The dense number of corporate finance advisers in the U.K. – ranging from investment and large professional services firms to mid-sized or small independent boutiques – means the landscape is competitive.

Larger firms have always tended to move up the spectrum of deal sizes, leaving smaller independent firms to fill.  Differentiation and USP are vital for independent boutiques to win mandates.  This may mean single or multi-sector focus, international reach through affiliations or international M&A networks, personalized and tailored services and flexibility in fee structures.  To get on well with business owners and understand client needs requires a personal touch.  With every changing markets, refreshed product range and services are essential.

In Malaysia, the total M&A deal in 2017 was RM82.8 billion (Read more here).  There are 65 licensed Corporate Finance Advisory firms.  Of this, 25 are independent boutiques.  The investment banks and the Big Four are principally involved in large ticket deals.  But the independents as agile as they are perhaps find constrained by rules and regulations of the last century.  Submission for any transaction must come through from investment banks or principal advisers (Read more here).  Independent, boutique advisors play a limited role in bond exercises or other due diligence work but submissions to authorities always invariably require another licensed intermediary, which then, leaves clients with why bother with independent advisors?

Independent advisors hope for a level “playing field”; and, if an advisor is not sufficiently equipped or manned then the authorities will assist in training to a level that is deemed acceptable.  In addition, boutique advisors (with 6 or less licensed rep.) are grouped voluntarily into 3 – 5 independent firms for purposes of marketing, branding and gathering of expertise for submissions.  Rules are then amended to reflect a more competitive landscape, although “big-ticket” items will still go to the large investment banks, and that is acceptable since the depth and scope for a transaction lies with them.  The authorities would do well to gather feedback for improvements to a system that has been in place for a very long time.

Industrial Strategy for the Future – Britain and Malaysia in Perspective

In November 2017, Britain published its industrial strategy “Building a Britain Fit for the Future”. The four grand challenges addressed for Britain were as follows:

On 31 October 2018, Malaysia launched the country’s Industry 4.0 policy or Industry4WRD. This National Policy focuses mainly on digitally transforming Malaysia’s manufacturing sector and its related services to embrace Industry 4.0. The policy envisions Malaysia as a strategic partner for smart manufacturing. The manufacturing sector contributed about 23% to GDP over the last five years. Growth is seen to be about 5% over the next 2-3 years. It places emphasis on SMEs as a significant proportion are in manufacturing. The Industry4WRD Council is in charge of implementing, monitoring and managing action plans under the policy.

Essentially, the Industry4WRD is depicted as follows:

It acknowledges other countries have embarked on their Industry 4.0 transformation and are in advanced stages of implementation. As such it suggests the following:

To succeed in a fast-changing environment we need to re-order our education eco-system. We cannot rely on existing policies and processes in the education sector to deliver an aspiration in the industry front. We have to be brave to revamp the secondary and tertiary levels or at least regenerate some schools and universities with focus on the future – AI, Big Data Analytics and Advanced Materials. Unless we do so, the Industry4WRD will just remain a good document!

References:

1. Industry4WRD – National Policy on Industry 4.0, Ministry of International Trade and Industry

2. University College London (https://www.ucl.ac.uk)

Medical Tourism – An Avenue for Growth?

The healthcare sector accounts for approximately 10% of world’s GDP. This has been rising on average by 5.2% a year between 2014 - 2018 and is expected to reach USD9.3 trillion. Spending is driven by a growing ageing population, rising affluence, longer life expectancy and lifestyle related diseases.

ASEAN’s overall healthcare expenditure has lagged behind that of developed countries. Japan and the U.K. spend twice as much per capita on healthcare compared to Malaysia, Singapore, Thailand and Indonesia (“ASEAN four”). Income levels and spending on healthcare are fairly closely related. So there is every chance of more spending in the ASEAN four.

The industry has the following key characteristics:

(i)         Resilience in a downward cycle – not unduly impacted by a recession;

(ii)        Low-price sensitivity – the higher end market is not price sensitive;

(iii)       Structural demand – continued steady growth expected with rising urbanisation;

(iv)       Increasing private healthcare investment meeting future needs;

(v)        Low insurance coverage, especially in ASEAN four – possibility for insurers to be involved; and

(vi)       Usually regulated operations by authorities.

There are also risks involved which are similar to other sectors:

·       Competition from local players and overseas centres;

·       Operating efficiency and management;

·       Size and scale of operations – the larger the operations, better is the access to finance;

·       Geographic location;

·       Service coverage – operations that cover more procedures reduces vulnerabilities of revenue stream; and

·       Clientele – as a service industry, consumer satisfaction is important

In the midst of this, is the growing niche on medical tourism. The expansion of which is largely attributed to affordability, treatment options and access to air travel. The revenue that medical tourism generates is substantial, for example Thailand earned more than USD3 billion in medical tourism in 2015. There are hospitals in Thailand with over 50% of its revenue coming from foreign patients.

Cost comparison of selected medical procedures

(USD)	USA	Singapore	Thailand	Malaysia	India
Coronary artery bypass graft	88,000	54,500	23,000	20,800	14,400
Valve replacement with bypass	85,000	49,000	22,000	18,500	11,900
Hip replacement	33,000	21,400	16,500	12,500	8,000
Knee replacement	34,000	19,200	11,500	12,500	7,500
Spinal fusion	41,000	27,800	16,000	17,900	9,500
Gastric bypass	18,000	13,500	12,000	8,200	6,800

                    Source: Patients Beyond Border, 3^rd Edition by Josef Woodman

On every procedure listed above, India has the lowest cost. Thailand is lower than us (Malaysia) for knee replacement and spinal fusion. We are more competitive than Singapore and the U.S. According to Malaysia’s Healthcare Travel Council (MHTC), healthcare travellers to Malaysia increased from about 0.64 million in 2011 to 1.05 million in 2017. MHTC was established to facilitate the strategic development of Malaysia’s healthcare travel industry and raise the country’s profile as a globally-preferred destination for world-class healthcare services.

With a little bit of imagination, we could market our procedures based on quality, speed and accessibility. There is need for a broad masterplan on this with coordinated steps by MHTC to harness our medical advantages.

Source: Various reports, including RAM (April 2016)

Hot Deals for Monday WW47'2018

Welcome to Hot Deals for Monday, where you have opportunities to Buy or Sell!

Opportunity 1

Marketing and retail footwear looking for new investors to acquire 20% stake in company.  Consistent dividends of 5% or more for over 5 years.

Opportunity 2

Property development company with good results and dividends.  Sale of about 25% equity interest in company.

Opportunity 3

Company dealing in outdoor and gym equipment, has been in business for 15 years.  NTA around RM7.5 mil.  Profit ranging from RM0.5 mil – RM1.0 mil.  Profit guarantee is feasible.  Offering price RM5.0 mil.

Opportunity 4

Oil Palm estate over 2,000 acres in Kedah.  With potential for property development.  Asking price RM3 p.s.f.

Opportunity 5

“Edupreneurship” opportunity!  An established education provider is offering an exceptional opportunity to grow entrepreneurs in higher education field.  The potential “edupreneur” will be given the chance to manage a college by taking a minor equity position (40%) in the education group for RM2.0 mil, with an option to buy-out the company later.

Opportunity 6

A European company is looking to acquire or JV with beverages company (including water or milk players) in Malaysia, Myanmar or China.

Opportunity 7

Sale of Software & IT business with revenues of over RM100 million and net income in the range of RM1.5 - 2.0 million.  Controlling stake (approx. 70%) is available.

Opportunity 8

Buyer looking for power plant (100MW and above) in Malaysia, Myanmar, Laos, Vietnam and Indonesia.

If you are interested in the above opportunities or would like to offer your hot deals, please contact info@mpcap.com.my or 603 - 2283 1170 for further details!

Financial Ratio Ranking for the Banking Sector (Part II)

In a previous article, we discussed about CAMELS rating methodology for banks (Read more here).  This week, we shall look at the financial ratios used in CAMELS.

Table 1 shows some selected ratios that fall within CAMELS rating methodology, amongst other:

Category	Financial Ratio
Capital Adequacy	Total Capital Ratio
Asset Quality	Gross Impaired Loan Ratio (GIL)
Management Capabilities	Efficiency Ratio
Earnings Sufficiency	Return On Equity (ROE)
Liquidity Positions	Liquidity Coverage Ratio (LCR)
Sensitivity to Market Risk	Value at Risk (VaR)
Non-CAMELS
Liquidity	Loan to Deposit Ratio (LDR)
Valuation	Price to Book (PB)

Table 1.  Selected Financial Ratios for CAMELS and non-CAMELS rating methodology

The ratios for CAME are readily available in Annual Reports, but the "Liquidity Positions" and "Sensitivity to Market Risk" are not commonly reported in banks’ Annual Reports.  For instance, BASEL III (Read more here) requires banks to report LCR and Net Stable Funding Ratio (NSFR) on monthly basis but they are not disclosed in the Annual Report.  Also, VaR is not published in an annual report as well.  Thus, for common investors to assess the ratios of bank stocks, we replace the “Liquidity Positions” and “Sensitivity to Market Risk” categories with liquidity and valuation ratio such as LDR and PB.

Table 2 and 3 are some real-world examples of the above ratios.  Data are taken from latest Annual Reports of eight commercial banks listed on Bursa Malaysia.  Readers are reminded not to rely solely on the brief financial ratio ranking for investment decision.

Table 2.  Selected Financial Ratios for eight commercial banks listed on Bursa Malaysia

Table 3. Selected Financial Ratios and Ranking for illustration purposes only.  It seems Hong Leong, Alliance and Public Bank stand ahead of other major banks based on the above ranking

Disclosure: The authors may have interest in the stocks of the companies in this article.

How Will the Federal Reserve Reduce Its Balance Sheet?

The Federal Reserve (“Fed”) is now tightening monetary policy in the U.S. Interest rates are moving up slowly. And concomitantly Fed’s focus is to address its USD4.5 trillion balance sheet.

In late 2008, the Fed began large scale purchases of assets – U.S. Treasuries (USD2.5 trillion) and government-supported mortgage backed securities (“MBS”) of USD1.8 trillion to inject liquidity into the system and prevent a collapse of the U.S. financial system. For six years, it was quantitative easing (“QE”) – which kept interest rates low while equities and corporate profits up. The idea was to spur growth. The U.S. financial system thereby survived.

On October 29, 2014 the then Fed Chairperson, Janet Yellen, announced the end of the bond-buying program. Fed’s plan to reduce balance sheet is through one of two ways – sell securities on its balance sheet or choose not to reinvest in maturing securities. The first step would put pressure on the bond market and cause interest rates to rise rapidly and we will have more volatility. By simply allowing balance sheet to decline slowly by not reinvesting in maturing assets is the second and more mature approach – about USD1.4 trillion of the USD2.5 trillion Treasuries have maturities of less than five years.

So what’s the final balance sheet size? The magic number is to be determined once the balance sheet drops to below USD3 trillion in 2020.

So what’s the consequence? Balance sheet reduction and interest rate rise will impact negatively on economic growth (a slowdown not negative growth) and the equities market world-wide.

By how much? That is a difficult question to answer!

Reference:  Various articles, including by Aaron Hankin (September 20, 2017)

Why Did U.S. Inflation Remain Benign With QEs?

Inflation is typically described as a persistent increase in general price level such as the consumer price index. As mentioned in an earlier article, Milton Friedman holds the view that “inflation is always and everywhere a monetary phenomenon”.

Monetarists and Keynesians have two competing explanations on aggregate money demand. Monetarists think that stability of income velocity of money (V) is important. Keynesians disagree with this notion. The Quantity Theory of Money (QTM) suggests the following equation:

MV = PQ

M stands for money (M2); V stands for velocity of money (rate at which people spend money); P stands for general price level and Q stands for quantity of goods and services produced. Based on the above, holding money velocity constant and if money supply increases at a faster rate than real economic output (Q), the price level (P) must increase to make up the difference.

If we follow this view, then inflation in the U.S. should be 31% per year between 2008 and 2013 (according to Federal Reserve Bank of St Louis, September 2014). Why? Because money supply grew at an average pace of 33% per year and output growth averaged just below 2%.

So why did inflation remain persistently below 2% between 2008 and 2013? The issue has to do with velocity of money. If money velocity declines rapidly in an expansionary monetary policy, it can offset any increase in money supply and lead to deflation rather than inflation. In the U.S., the monetary base increase did not cause a proportionate increase in general price level of GDP because of a dramatic increase by the private sector (including banks) to hoard money instead of spending it. And why did they hoard? A possible answer is a combination gloomy economic outlook after the financial crisis and a dramatic decrease in interest rates. So people rather hold money or invest in equities – the Dow above 25,000. And inflation remains rather benign for now.

This Photo by Unknown Author is licensed under CC BY-SA-NC