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ASEAN STOCK WATCH Asean Affairs   23 April 2012

ASEAN Weekly Outlook

By Shayne Heffernan Ph.D.

History shows that it is time for the S&P 500 to pull a repeat of 2010 and 2011, sell in May and go away as the saying goes, when a traditional mid-year pullback followed an April peak, and that smart investors are selling U.S. stocks after highs reached earlier in the month.

As Warren Buffett has said, "You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing."

Right now it is time to be cautious, consolidate your Portfolio and Hedge the profits you have made in this run up.

I am already in this mix having sold out some positions earlier in the month, given we are due for a seasonal retreat, there are issues in the Middle East, an ongoing Circus in Europe and a looming US election. I also have concerns about the weight of AAPL in the exchanges of the USA.

We are now focused on buying ASEAN Stocks, in particular those that will see big gains with ASEAN +3 2015. Banks, Agriculture, Commodities lead our interest.

We also have a strong leaning towards Singapore and the Singapore Dollar. Next best is Hong Kong and the HKD and RMB.

Economic growth in Southeast Asia will be faster than in the United States and Europe, two regions that face challenges because of a slow recovery from recession and high debt levels.

ASEAN +3 is the Association of Southeast Asian Nations (ASEAN), the People’s Republic of China (including Hong Kong), Japan, and South Korea.

Home to 600 million people, ASEAN has a combined gross domestic product (GDP) of US$1.8 trillion with total trade valued at $2 trillion among the countries.

ASEAN is set to explode as an economic force in 2015 as financial, trade and investment rules become integrated and seamless. Asean last year secured $78.5 billion in investments. Regional trade also increased by 32.9 percent to more than $2 trillion.

The Association of Southeast Asian Nations is beefing up various frameworks for cooperation and development within the region and with its trading partners, in preparation for regional economic integration by 2015.

Trade Secretary Gregory Domingo related that during the recent Asean Summit in Bali, Asean leaders adopted the Asean Framework for Equitable Development, which contained innovative ways to improve financial access and security in the region.

It also provided for a regional forum on best practices in the field of access to finance.

The Asean Framework for Regional Comprehensive Economic Partnership, on the other hand, aims to enhance the Asean’s relationship with its trading partners, which include China, Korea, Japan, Australia and New Zealand.

Under this framework, working groups in trade in goods, services and investments would be set up to lay down the specific principles and a template for engagement with Asean trading partners.

Also during the Bali meeting, Asean leaders inked the second package of commitments for the trade in services component of the Asean-China Free Trade Agreement.

The Asean leaders also signed the second protocol to amend the agreement on trade in goods under the Asean-Korea FTA.

ASEAN +3 and 2015

Asean seeks to mirror the EU’s economic integration. Its three decision-making and implementing bodies mimic the EU’s set-up. However, the respective forms of integration within the EU and Asean are fundamentally different. The EU is a supranational model of cooperation. Member countries share in decision-making that transcends national boundaries. The Asean Charter, on the other hand, defines the regional bloc as a legal entity and inter-governmental organization that has authority over its members. Underlying the move toward unity and integration is its new motto: “One vision, one identity, one community.”

Decision-making and implementing bodies are currently split into three defined groups: the Asean Summit, the Asean Coordinating Council, and the Asean Community Council. The bloc’s charter strengthens the authority of the Asean Summit as the highest decision-making body. If it discovers that a member country is not implementing Asean proposals or decisions, or discovers a serious breach of the charter or the bloc’s basic principles, the Summit is empowered to issue a resolution on the matter. The Summit will also receive an annual report from the secretary-general as well as three separate reports and suggestions from the Community Council.

In The USA

All the Action will be Wednesday and Thursday on the ASEAN markets following key events scheduled for Wall St Tuesday and Wednesday.

The big news is Tuesday and the APPLE NASDAQ:AAPL Earnings, nearly 180 of the S&P 500's components will report earnings next week, and heading into a seasonally weak period, the market will need strong reports to offset the perception that there's no more room to rally.

While the largest U.S. company by market capitalization has a history of blowout quarters, many say the company's meteoric rise so far this year has created unrealistic expectations. Earnings this quarter may be great, but the market is expecting too much.

Tuesday will also see the start of another policy-setting meeting of the U.S. central bank's Federal Open Market Committee.

A slowly improving U.S. jobs market and reasonably solid growth at the start of the year brightened the economic outlook and cut chances the Fed will conduct another round of bond purchases.

With the Fed monitoring a healing but still fragile economy, the statement expected on Wednesday will be closely watched by investors.

So far, with 23 percent of S&P 500 companies having reported results, more than four-fifths have beaten expectations, topping consensus forecasts with an average surprise factor of 8.8 percent. Profit growth in this quarter has been up 6.2 percent.

A Lesson in Hedging

Hedging techniques generally involve the use of complicated financial instruments known as derivatives, the two most common of which are options and futures. We’re not going to get into the nitty-gritty of describing how these instruments work, but for now just keep in mind that with these instruments you can develop trading strategies where a loss in one investment is offset by a gain in a derivative.

Let’s imagine that we own 100 shares of ABCD at $35 and want to hedge this position should the stock decline further. Recent events may have us feeling the stock is vulnerable to the $23 level, which has been a level in past trading where the stock has rebounded. Let’s imagine that shares of ABCD finished trading at $30. In essence, the stock has declined $5 per share since purchase, and, now, we want to hedge that position.

When shares of ABCD open for trading, we may not want to sell the stock and REALIZE a loss. Instead of selling ABCD for a loss, we may want to hedge this position for a period of time using a put option. A hedge like this gives the investor the opportunity to “buy some insurance” on the stock held in his / her account for a period of time.

Let’s assume that we want to hedge into January. Because our example is that a trader owns 100 shares of stock, a hedge would be to buy 1 put contract (1 contract equals 100 shares).

Let’s now assume that the ABCD January $30 put (ABCMF) was offered at $2.30. Let’s assume that the stock opens for trading at $30.

If a trader buys 1 contract, his / her outlay of cash would be $230 plus commission paid. Once the option is bought, our hedge would be as described in the following paragraphs.
We would still hold long 100 shares of ABCD with a cost basis of $35 ($3,500). Once the put option is bought, the trader has established the RIGHT, but not the OBLIGATION to sell his / her stock at $30 between now and the January option expiration (Friday before the 3rd Saturday of January). This transaction costs the trader $230. (Note: A hedge position is considered a “neutral” position.)

Should the stock eventually fall to the $23 level (before option expiration), our 100 shares would be worth $23 ($2,300), but our January $30 put would be worth approximately $7 ($30 strike of option — $23 market price). As you can see, the put option has increased in value; thus, we’ve hedged against the downward move.

If shares of ABCD do fall to $23, and we do not hedge our position, our original investment of $3,500 will be worth $2,300 (paper loss of $1,200).

The hedged position under outlined assumptions would have required a total cash outlay of $3,500 (underlying stock), plus the $230 (cost of option excluding commissions), for a total cash exposure of $3,730. At a market price of $23, the HEDGED POSITION would be worth $3,000 ($2,300 in stock + the now $700 value of put option).

The previous example demonstrated a hedge position on a stock where we were already at a loss. Many institutions and investors will hedge positions that are currently in the position of profit. I would argue that the options market was originally created to allow investors the opportunity to hedge and help mitigate risk, not speculate on stock price direction.

Real Estate

Myanmar Real Estate Outlook

ASEAN — the regional group to which Myanmar belongs — wants to be supportive and so does Singapore. This goes beyond the politics of having Myanmar assume the group’s chairmanship in 2014. ASEAN’s plan for a more integrated economic community in 2015 can also gain.

Around 70% of Singaporean companies invested in Myanmar are involved in hotel construction, tourism and real estate. The rest are involved in agricultural, energy, mining and manufacturing ventures.

Myanmar sits at the crossroads of Asia’s great civilisations of India and China, and looks out onto the vast Indian Ocean next to Thailand. One of South East Asia’s largest and most diverse countries, Myanmar stretches from the sparkling islands of the Andaman Sea in the south right up into the Eastern Himalayan mountain range.

As of October 2011, Singapore was the sixth-largest source of foreign direct investment in Myanmar, with 74 Singaporean companies contributing a total of US$1.8 billion, according to Myanmar’s Ministry of National Planning and Economic Development.

Singaporean businesses started to enter Myanmar, then known as Burma, in 1988 when the then ruling State Law and Order Restoration Council (SLORC) ended General Ne Win’s dictatorial rule and started tentatively to open the hermit country to more international trade.

Singapore

Singapore is the world’s most livable city for Asian expatriates, according to rankings by the corporate development firm ECA International released on this week.

The organization ranked 400 cities worldwide on living standards like infrastructure, air quality and crime rates. Singapore rose to the top of the list for Asians living abroad, with Sydney and Adelaide following in second and third. The rankings exist to help companies set corporate allowances for Asian workers living in a new country.

Basically, the more livable a city, the less a company needs to pay employees to entice them to move abroad.

“When a location has good air quality, excellent infrastructure and health care facilities, low crime and health risks — all the attributes Singapore offers — companies are likely to provide just a low allowance, or none at all,” Lee Quane, regional director of ECA International, Asia said.

The city-state was also listed as the best city for Asian expats living in Asia. Kobe, Japan, and Honk Kong were ranked second and third. Tokyo fell to number four following last year’s earthquake and tsunami. Yokohama was similarly impacted.

“When a natural disaster occurs, infrastructure, utilities, availability of goods are all likely to be impacted for the worse and this is what we have seen in these two locations,” Quane said.

Baghdad, Kabul and Port-au-Prince were listed as the world’s least livable cities for Asian expats.

Jakarta scored low on the Asian cities list, coming in 38th out of 50, below Phnom Penh and New Delhi (both 36), but above Yangon (40) and Surabaya (41).
 

The most secured and durable investment is real estate property. History has proven that although real estate prices may have fluctuated from time to time, over the long-term real estate property has appreciated in value. The security for a mortgage is real estate property.

Private mortgages provide a regular income stream, tangible security and a real return to the investor that is superior to bank deposit, GICs and bonds.

There are many reasons why these investments are so highly sought after, which include the following:

1.Low Administration Costs: Each of us who have had a mortgage know how long it takes to pay this debt off. The Banks know this as well. The borrower is required to pay the costs to have the mortgage registered against title to their property. The Bank simply sits back and goes about cashing the monthly payment for years without incurring any further cost whatsoever.

2.Cash-Flow: A mortgage generates cash each and every month. Obviously the amount of the monthly payment will depend on the size of the mortgage, the interest rate and amortization period. However the payment comes in each month if the borrower does not want to loose their home. The fact is that the mortgage payment will be the last payment not made by someone in financial difficulty, and if bankruptcy occurs, a mortgage holder’s security is not affected by the borrower declaring bankruptcy.

Shayne Heffernan Ph.D.  
Linda Johnson, Business Development Director - Private Client Group, Heffernan Capital Management
Sales@Heffcap.com
 
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