INVESTMENT ANALYSIS

GSM 5421
Dr. Chen Chaw Min

Our Expectation
There is not enough time to
do everything, but there is
always enough time to do the
most important things

Outline Lecture 1

Introduction to investments
Real Assets versus Financial Assets
Financial markets and the economy
Investment Process and markets
Players
Recent trends

Investment

Definition:
Current commitment of money or
other resources in the expectation of
reaping future profits

A $1 Investment in 190

A $1 Investment in 190
Real
Returns

Investable Assets

Assets

Two types:

Real
Assets

Financial
Assets

Real Assets vs Financial Assets

Real Assets : that can be used to be

produce goods and services eg. Land,
buildings, machines
Physical - hard
Financial Assets: claims to the
income generated by real assets (eg.
stocks and bonds) allocation of
wealth among investors - paper

Distinct Class of Financial Assets

Fixed income or debt securities

- a promise stream of income
Common stock or equities
- ownership of shares in corporation
Derivatives securities
- payoffs determined by prices of other assets
e.g. of derivatives: options and futures contracts
Commodities
Currencies

Medium of Investment

Money
Money?? - Real assets or financial
assets
**You can retire but not your
money

Function of Money

Money is for:
Medium of Exchange
a means of payment: transactions
- Unit of Account
accounting unit of standardized measure
of value in which prices are quoted
- Store of value
something that retains its value if held
**Relate to interest rates, exchange rates
and inflation

Financial market and economy

Financial System in Malaysia

Financial System
Financial Institutions

Financial Markets

Banking System

Money & Foreign

Exchange Markets

Non-bank Financi
al Intermediarie
s

Capital Markets
Derivatives Markets
Offshore Market

Role of the Financial System

Financial intermediary for

efficient allocation of resources
Operations of payments system
to facilitate payment in return for
goods & services
Channel for transmission of
monetary policy

Financial Markets

Market where buyers and sellers

come together to exchange
something
Financial Instruments/products are
exchanged.
A Financial Market is known by type
of product traded in it

Investment Landscape

IN

E
V

S
R
O
T
S

IS
SU
E

RS

FINANCIAL
MARKETS
-exchange-

Financial
Assets

$Money$
REGULATED OR PRIVATE

Issuers
Issuers
Investors

Platform

Distribution

Stocks

Bonds

Derivatives
and Others

Lead Arrangers (LAs)

Over the Counter

(OTC)

Institutional
Financial Institutions
Foreign Investors

Exchange

Market Place
Retail Driven

CATEGORIES OF INVESTORS

INDIVIDUAL:
Retail Investors- Individuals -minority (< 5%
shares) - High Net Worth Investors
Employees
INVESTMENT BODIES:
Institutional Investors EPF, Insurance Co.
Unit Trusts eg. PNB and Public Mutual
Foreign Institutions - pension, mutual funds,
hedge fund, SWF etc

TYPES OF INVESTORS

Basic Fundamental of Investment =

investors interested in total return from
investment (combination of capital
appreciation and cash returns)

3 types
Growth investors
Value Investors
Income Investors

TYPES OF INVESTORS
Growth
Investors

Value Investors

- Focus on rising
trends in revenues
and cash flows
which match
investment horizon
- Less interested in
dividend payout
- Ultimate -future
share price

-Focus on companies

Income investors

- Focus on
with hidden virtues
companies with
not recognized by
good dividend
the market
payouts relative to
- consider companies the share price or
in recovery process, companies with
surplus cash ie.
which might be
Potential for capital
acquisitions targets
repayment
and on cyclical
uptrend

ISSUERS

Corporations
Government borrow money
Central Bank

Issuers (Corporations)

What is a Corporation?
Purpose business: investment in growth
Shareholders control or diffuse
Activities operations
- investment
- financing
Methods of financing bank loans or
issuance of stocks, bonds or others

Understanding the economy

Measurement of growth GDP

Fiscal policy budget deficit
Expectation hypothesis

Gross Domestic Products (GDP)

GDP
= Consumption +
+ Private Investment
+ Government Spending
+ Differences in Export and Import
2014 5%-5.5%

Fiscal policy
Fiscal expansion
Fiscal Neutral
Fiscal Consolidation

Current Issues: Addressing the

Budget Deficit

Federal Government Financial Position

(RM Million) 2012 - 2012
2014
GDP
5.6%

2013
GDP
4.5 5.0%

2014
GDP
5.0 5.5%

Actual

Revised Budget

Budget

207,913

220,422

224,094

127,020
33,754
27,000

133,148
35,995
27,000

205,537

216,184

217,651

Current Account Balance

2,376

4,238

6,443

Development Expenditure

46,932

45,065

44,500

2,606

1,574

949

- 41,951

- 39,253

- 37,108

% to GDP (Deficit)

-4.5

- 4.0

- 3.5

Debt to GDP (%)

53.3

54.8

54.7

Revenue
of which:

LHDN
Customs
PETRONAS dividend

Operating Expenditure

Less: Loan Recoveries

Overall Balance

116,937
32,068
26,260

27

Fiscal Instruments

Financing (Borrowing)
Sources of financing government
deficit

Borrowing Policy

To finance Development Project

To borrow from Domestic

sources as much as possible

To borrow from the cheapest

source

Domestic Market
To secure funds from the domestic market,
the following is taken into account :

Liquidity

To develop the domestic bond market and

establish a bench mark for corporate bonds

There is no currency exposure

1st Priority: Tapping Domestic Market

Government Domestic Borrowing

Sources:

Domestic Market
Labuan

Instruments:
Malaysian
Government
Securities

Treasury Bills

Government
Investment Issues

Syndicated Loan

2st Priority: Tapping External Market

Government External Borrowing

Sources:

International Market

Instruments:
Through issuance of Global Islamic Bond,
Global Bond, Euro Bond and Samurai Bon
Purpose: For general purpose

Multilateral

Bilateral

World Bank
Asian Development Bank
Islamic Development Bank
Japan Bank for International Cooperation
(JBIC)
Other Government, e.g. Spain, Germany

Fiscal Instruments
Key concern:

Bankrupt if keep borrowing?

Expectation hypothesis

Purpose of financial market

Financial concepts

Financial concept

To facilitate the transfer of funds between

borrowers and lenders

Elements : Trade time and risk

1. Price Discovery
trading in secondary market provided
public information on assets prices
Informational role
Information asymmetry

Financial concept
2. Lower search costs
trading parties converge to same location,
matching is made easier

3. Provides liquidity
investors can sell assets prior to maturity
in secondary markets - satisfy their
preference for consumption and
diversification needs
consumption timing

Financial concept

4. Allocation of risks

choices in investment of securities like bonds

or stocks

5. Impose corporate governance and

corporate ethics on traded firms

Avert financial scandals

Auditors -Watchdogs (Auditors Oversight Board*)
Independent directors

Financial concept
6. Separation of ownership and
management*
concentrate versus diffuse ownership
(Berle and Means,1932)
Ownership (Individual vs Institutional
Owners)
Agency problems (Principal and agent
Jensen, 1972)
* Extensive Research

IMPLICATIONS OF FINANCIAL
MARKETS

Companies choose to remain private

- retain flexibility of private control
public disclosure and accountability
requirement
- Many companies not attractive to
public investors
- cost prohibitive for IPO compared
to bank funding

REGULATORS

Protection to Investors
Fairness and Transparency
Establishment of Efficient
Mechanisms and Systems
Financial Stability

EXAMPLES OF REGULATORS

Bank Negara Malaysia

Securities Commission
Bursa Malaysia
Company Commission
Labuan Financial Services
Authority

Rating Agencies*

Set up to further develop bond market

Independent opinions on potential default of
specific issues & disseminates information
to investors.
International Rating Agencies Moodies,
S&P and Fitch Rating
Currently 2 rating agencies in Malaysia:
Rating Agency Malaysia Bhd (RAM),
incorporated Nov 1990
Malaysian Rating Corp Bhd (MARC),
incorporated Oct 1995

Development of
Financial Markets

CHANGES TAKING PLACE ON

ALL FRONTS
Liberalisation &
globalisation of
financial markets
Emergence of new
financial centres &
new players
Advancements &
improvements in
technology

market volatility &

competition
risk of contagion
Diversification of
financial services

Improve efficiency levels & competitiveness

Enhance regulatory & supervisory framework, but

flexible, pro-active & effective

Create efficient, resilient & competitive banking and

capital sector

RECENT TRENDS
1.

Globalization

As markets become global, create issue of

supply and demand
- Demand - rising income and aging population
(pension fund)
- Supply - quality companies eg. Tech stocks
*limited supply co.s buyback and merger

RECENT TRENDS
2.

Exposure to foreign investment

securities

Structure of financial markets changed

- eg. Institutional investors (USD
trillion in assets) drive markets, not
bank

RECENT TRENDS
3. Securitization
Assets backed securities
Islamic Securities

Deregulation, competition and financial innovation

- wide variety of financial instruments with different
risks profile

Read articles on sub-prime Crisis

Recent Trends
5.
6.

Financial Engineering
Uses math model and computer-based trading
technology to synthesize new financial
products
Bundling and Unbundling
Impact of technologies on Securities Market accountability and fairness to investors

RECENT TRENDS
6. Computer Networks
- Eg. Chicago Mercantile Exchange and Bursa
Malaysia collaboration of CPO Derivatives
- Euronext buying NYSE
Technology and tax reform lower transaction costs
eg. Web and discount broking

THE END

It is not because things are

difficult that we do not dare, it is
because we do not dare that
things are difficult
-Seneca

Q&A