In search of the happy median in oil price

Business Times - 10 Jun 2009

The oil price is not the equilibrium between oil supply and demand, says Shell CEO

By RONNIE LIM, ENERGY EDITOR

IS THERE a Goldilocks oil price - not too hot, not too cold, but just right - to help global economies through the downturn?

True to form, Shell chief executive Jeroen van der Veer - who participated in a media dialogue on the sidelines of the Asian Oil and Gas conference in Kuala Lumpur this week - shied away from commenting directly on this. 'We are very lousy at predicting prices,' he has often said.

The current recession, he cautioned, masks various hard truths, especially that when the economic recovery comes it will be very difficult for the oil industry to supply all that extra energy needed. This doesn't include the rising greenhouse gas emissions problem then.

The International Energy Agency (IEA) has said that investment in the upstream exploration and production (E&P) sector will fall by more than 20 per cent this year. And investments in renewables are falling even faster - by almost 40 per cent compared to last year.

'All this points to new price spikes and volatility further down the road,' warned Mr van der Veer.

Asked if he thought last week's run-up in oil prices to US$70 a barrel denoted a market which had run ahead of itself, he said: 'Shell's key message is regardless of whether the oil price is high or low, or volatile, we simply monitor it to see if we can do a better job than the competition. If you know that, then you take the oil price as it is . . . so we see ourselves as a price taker.'

'But having said that, in the long term the world will find difficulty securing supplies, so the oil price will not be really cheap. Short-term we don't really have a clue on how oil prices will develop,' he said. Just as the IEA has indicated, 'it's hard to forecast when the next oil price hike will come, as we don't know exactly when the recession will end, and whether it's U-shaped or V-shaped, and we don't know what Opec will do, and what's going to happen with energy efficiency, and whether the habits of consumers will change. Will people buy smaller cars, or the Chinese use Hummers?'

Mr van der Veer said that his short answer to the question of 'What is a fair oil price?' posed by Malaysian Prime Minister Najib Razak at the Kuala Lumpur conference was: 'We don't know.'

The oil price is not the equilibrium between oil supply and demand, he said. 'I've learnt in life that that's not correct, as the oil price is basically expected demand compared to expected supply and we've seen a lot of that in the derivatives market.'

'The reason it is (the equilibrium between) expected demand and expected supply, is because both sides have huge uncertainties. That's one of the reasons why you have a lot of volatility to come and that gives opportunity to derivatives markets, which thrive on this,' he said.

Asked if he thought the recent rise in oil prices was indeed indicative of economic 'green shoots', the Shell chief said: 'We follow it. We think that towards end-2008, when oil prices fell to US$35, it had to do with people closing positions in the paper market then.'

'At this moment, when we look at the world, there's still a lot of floating storage around, again it's about expected demand and expected supply, and maybe people are being optimistic about economies turning. But I'm just a simple businessman and not a macro-economist.'

Be that as it may, what would Shell consider a 'comfortable' oil price to stimulate E&P again? Rival BP CEO Tony Hayward had indicated earlier this year that US$60-US$80 oil could do the trick.

On this, Mr van der Veer said that Shell is spending a net US$31 billion to US$32 billion on capital expenditures this year, adding that 'indeed we screen all the projects from the viewpoint of relatively low oil and gas prices, otherwise we wouldn't do it'.

The oil giant, he said, had delayed an extension of a very large oil sands project in Canada - but this was not because the low oil prices could not support the oil sands project, he explained, but because the project market (costs of construction and materials) was overheated last year.

'So the point is you have to balance oil prices with construction and material costs, and at this moment you get more from lower (project) costs than outguessing the oil market.'

But doesn't this still beg the question of how the oil industry is to reconcile the dilemma of low prices depressing investments and the need to do more to gear up for increased energy demand in future?

Responding, Mr van der Veer said that 'first of all, we're very glad we made our final investment decisions (on various big projects) before construction costs went up, so we could avoid the top of the market, for example like offshore rigs three to four years ago before prices shot through the roof. We still benefit from that today.'

'For the next expected oil price spike, we expect that construction prices, while down now, may go up again, so it makes a lot of sense to continue to be a high investor at this time so as to benefit from lower construction costs. Besides, if you are a constant investor, then you have constant staff and engineers, and you do a better-quality job.'

Besides, the days of easy oil are over, and that huge investments and long lead times are needed to extract oil.

Shell's Sakhalin LNG project - expected to produce four billion barrels of oil and gas - cost just a total investment of US$20 billion, or about US$5 a barrel in costs. This was because it started work on the project way back in 1977, and it is only now that the project is starting to produce, he said.

On the role of speculators pushing up oil prices, Mr van der Veer said he was more ambivalent today about them playing a major in this than he did previously.

'Shell did a lot of studies on this last year, and compared to two years ago when I said that the extent of open positions in the market played a major role in pushing up oil prices, now we say: We don't know.'

'It's a more complex phenomena. It's chicken-and-egg but what's the chicken and what's the egg? What is psychology and undercapacity and overcapacity?'

'The only thing we can say is that the size of the paper market compared to the physical or real market has now decreased. Yes, derivatives and open positions played a role in driving up oil prices, but we feel less sure they say they were the culprits,' concedes the Shell chief.

Poking holes in a theory on markets

Business Times - 10 Jun 2009

The efficient market hypothesis, near dogma for decades, has taken some serious body blows

(NEW YORK) FOR some months now, Jeremy Grantham, a respected market strategist with GMO, an institutional asset management company, has been railing about - of all things - the efficient market hypothesis. You know what the efficient market hypothesis is, don't you? It's a theory that grew out of the University of Chicago's finance department, and long held sway in academic circles, that the stock market can't be beaten on any consistent basis because all available information is already built into stock prices. The stock market, in other words, is rational.

In the last decade, the efficient market hypothesis, which had been near dogma since the early 1970s, has taken some serious body blows. First came the rise of the behavioural economists, like Richard H Thaler at the University of Chicago and Robert J Shiller at Yale, who convincingly showed that mass psychology, herd behaviour and the like can have an enormous effect on stock prices - meaning that perhaps the market isn't quite so efficient after all. Then came a bit more tangible proof: the dot-com bubble, quickly followed by the housing bubble. Quod erat demonstrandum.

These days, you would be hard-pressed to find anybody, even on the University of Chicago campus, who would claim that the market is perfectly efficient. Yet Mr Grantham, who was a critic of the efficient market hypothesis long before such criticism was in vogue, has hardly been mollified by its decline. In his view, it did a lot of damage in its heyday - damage that we're still dealing with. How much damage? In Mr Grantham's view, the efficient market hypothesis is more or less directly responsible for the financial crisis.

'In their desire for mathematical order and elegant models,' he wrote in his firm's quarterly letter to clients earlier this year, 'the economic establishment played down the role of bad behaviour' - not to mention 'flat-out bursts of irrationality'.

He continued: 'The incredibly inaccurate efficient market theory was believed in totality by many of our financial leaders, and believed in part by almost all. It left our economic and government establishment sitting by confidently, even as a lethally dangerous combination of asset bubbles, lax controls, pernicious incentives and wickedly complicated instruments led to our current plight. 'Surely, none of this could be happening in a rational, efficient world,' they seemed to be thinking. And the absolutely worst part of this belief set was that it led to a chronic underestimation of the dangers of asset bubbles breaking.'

I couldn't help thinking about Mr Grantham's screed as I was reading Justin Fox's new book, The Myth of The Rational Market, an engaging history of what might be called the rise and fall of the efficient market hypothesis.

Mr Fox is a business columnist for Time magazine (and a former colleague of mine) who has long been interested in academic finance. His thesis, essentially, is that the efficient marketeers were originally on to a good idea. But sealed off in their academic cocoons - and writing papers in their mathematical jargon - they developed an internal logic quite divorced from market realities. It took a new group of young economists, the behaviouralists, to nudge the profession back toward reality.

Mr Fox argues, echoing Mr Grantham, that the efficient market hypothesis played an outsize role in shaping how the country thought and acted in the last 30-plus years. But Mr Fox parts company with him by also arguing that the effect wasn't necessarily all bad. As for the question of whether an academic theory hatched in Chicago led to the financial crisis, suffice it to say that some questions can never be answered definitively. Which isn't to say they shouldn't be asked.

'There are no easy ways to beat the market,' Mr Fox said when I spoke to him a few days ago. If you want to point to the single best thing the efficient market hypothesis taught us, that is the lesson: we can't beat the market. Indeed, the vast majority of professional money managers can't beat the market either, at least not on a regular basis.

As Mr Fox describes it, much of the early academic work that led to the efficient market theory was aimed at simply showing that most predictive stock charts were glorified voodoo - just because a pattern had developed didn't mean it would continue, or even that it had any real meaning. Dissertations were written showing how 20 randomly chosen stocks outperformed actively managed mutual funds. (Hence the phrase 'random walk,' to connote the near impossibility of beating the market regularly.) Mr Thaler, the Chicago behaviouralist, says that evidence on this point - 'the no free lunch principle,' he calls it - is clear and convincing.

In time, this insight led to the rise of passive index funds that simply matched the market instead of trying to beat it. Unless you're Warren Buffett, an index fund is where you should put your money. Even people who don't follow that advice know they should.

As it turns out, Mr Grantham was an early advocate of index funds, mainly for unsophisticated investors who have no hope of beating the market. But he also believes that professionals should do better precisely because, as he puts it, 'the market is full of major league inefficiencies.'

'There are incredible aberrations,' he told me over lunch not long ago. 'The US housing market in 2007. Japan in the 1980s. Nasdaq. In 2000, growth stocks were three times their fair value. We were quoted in The Economist in 2000 saying that the Nasdaq would drop by 75 per cent. In an efficient world, you wouldn't have that in a lifetime. If the market were truly efficient, it would mean that growth stocks had become permanently more valuable.'

As Mr Grantham sees it, if professional investors had been willing to acknowledge these aberrations - and trade on the fact that the market was out of whack - they should have been able to beat the market. But thanks to the efficient market hypothesis, no one was willing to call a bubble a bubble - because, after all, stock prices were rational.

'It helped mould the 'this time it's different' mentality,' he said. Indeed, professional money managers who tried to buck the tide wound up losing their jobs - because everybody else was making money by riding the bubble for all it was worth. Meanwhile, government officials, starting with Alan Greenspan, were unwilling to burst the bubble precisely because they were unwilling to even judge that it was a bubble. 'Our default reflex is that the world knows what it is doing, and that is extravagant nonsense,' Mr Grantham said.

But as much as I've admired Mr. Grantham's writings over the years, I think the truth, in this case, is a little more subtle. Given the long history of bubbles, I suspect this crisis would have taken place with or without the aid of the efficient market hypothesis. People thought 'it's different this time' in the 1920s, long before anyone was writing about efficient markets. And over the course of history, professional money managers have been just as fearful of bucking the trend as they were during the Internet bubble.

Mr Fox sees it somewhat differently. On the one hand, he says, the efficient market theoreticians always assumed that smart market participants would force stock prices to become rational. How? By doing exactly what they don't do in real life: take the other side of trades if prices get out of whack. Their ivory tower view reflected an idealised market that simply doesn't exist.

On the other hand, Mr Fox says, what was truly pernicious about the efficient market hypothesis is the way it allowed us to put asset prices on a pedestal that they never deserved. Stock options - supposedly based on a rational price - became prevalent in part because higher stock prices were supposed to be the rational reward for good performance.

Or take the modern emphasis on market capitalisation. 'At some point in the early 1990s (or maybe it was in the late 1980s), market capitalisation became accepted as the best measure of a company's importance,' Mr Fox wrote me in an e-mail message. 'Before then it was usually profits or revenue. I think that's a classic example of the way efficient market theory seeped into popular discourse and shaped how we perceived the world. It wasn't entirely stupid - profits and revenue are flawed, limited measures, and market value does tell you something useful about a company. But it was another one of the ways in which asset prices came to rule the world, which eventually turned out to be a bad thing.' - NYT

Myths that stand in the way of investors

Business Times - 10 Jun 2009

By SHANE OLIVER

GIVEN the complexity of investment markets and investing, along with the massive amount of information available to investors, many people rely on logic based on 'common sense' or simple 'rules of thumb' in making investment decisions. However, while some such rules of thumb are reasonable, in many cases they are not and can result in investors missing opportunities or losing money. In this note, we look at some of these and why they are unreliable.

Myth #1: High unemployment will prevent an economic recovery

This argument is wheeled out every time there is a recession - like now. If it were correct then economies would never recover from recession but simply spiral down into the sort of crises that Karl Marx predicted would ultimately lead to the demise of capitalism. Of course, no such thing happens. Rather, the boost to household discretionary income from lower mortgage bills (as interest rates fall) and tax cuts or stimulus payments to households during recessions eventually offsets the fear of unemployment for the bulk of people still employed. As a result, they eventually start to spend more which in turn gets the economy going again. In fact, it is normal for unemployment to keep rising during the initial phases of an economic recovery as businesses are slow to start employing again fearing the recovery won't last. Since share markets normally lead economic recoveries, the peak in unemployment often comes a long time after shares have bottomed.

Myth #2: Business won't invest when capacity utilisation is low

This argument is also rolled out during recessions. The problem with this myth is to ignore the fact that capacity utilisation is low in a recession simply because spending - including business investment - is weak. So when demand turns up, profits improve and this drives a pick-up in business investment which in turn drives up capacity utilisation. So while business investment in key countries right now is poor, providing there will be a pick up in demand - and several indicators are pointing to such later this year - then business investment will start to improve even though many factories are still idle.

Myth #3: Corporate CEOs, being close to the ground, should provide a good guide to where the economy is going

Again this myth sounds like good common sense. However, senior business people are often overwhelmingly influenced by their own sales figures but have no particular lead on the future. In the late stages of the early 1980s and early 1990s recessions, anecdotal comments from Australian CEOs were generally bearish - just as recovery was about to take hold. Note this is not to say that CEO comments are of no value; but they should be seen as telling us where we are rather than where we are going.

Myth #4: The economic cycle is suspended

A common mistake investors make at business cycle extremes is to assume that the business cycle won't turn back the other way. After several years of good times, it is common to hear talk of 'a new era of prosperity'. Similarly, during bad times it is common to hear talk of 'continued tough times'. But history tells us the business cycle is likely to remain alive and well.

Myth #5: Crowd support for a particular investment indicates a sure thing

This 'safety in numbers' concept has its origin in crowd psychology. Put simply, individual investors often feel safest investing in a particular asset when their neighbours and friends are doing so and the positive message is reinforced via media commentary. The only problem with it is that while it may work for a while, it is usually doomed to failure. The reason is that if everyone is bullish and has bought into the asset, there is no one left to buy in the face of any more good news, but plenty of people who can sell if some bad news comes along. Of course, the opposite applies when everyone is bearish and has sold - it only takes a bit of good news to turn the market up. The trick for smart investors is to be sceptical of crowds rather than drawing comfort from them.

Myth #6: Recent past returns are a guide to the future

This is another classic mistake that investors make, which is again clearly rooted in investor psychology. Reflecting the difficulty in processing information, short memories and wishful thinking, recent poor returns are assumed to continue and vice versa for strong returns. The problem with this is that combined with the 'safety in numbers' myth it results in investors getting into an investment at the wrong time (when it is peaking) and getting out of it at the wrong time (when it is bottoming).

Myth #7: Strong economic growth and strong profit growth are good for stocks and poor economic growth and falling profits are bad

This is generally true over the long term and at various points in the economic cycle, but at cyclical extremes it is usually very wrong and constitutes another big mistake investors make. The big problem is that share markets are forward looking, so when economic data is really strong - measured by strong economic growth, low unemployment - the market has already factored it in. In fact the share market may then start to fret about rising cost pressures and rising short-term interest rates. As an example, when global share markets peaked in October/November 2007 global economic growth and profit indicators looked good.

Of course, the opposite occurs at market lows. For example, at the bottom of the last bear market in shares back in March 2003, global economic indicators were very poor and the general fear was off a 'double dip' back into global recession. As it turned out despite this 'bad news' stocks turned around, with better economic and profit news only coming along later in the year to confirm the rally. History indicates time and again that the best gains in stocks are usually made when the economic news is poor and economic recovery is just beginning or not even evident.

Myth #8: Strong demand for a particular product produced by a stock market sector (for example, housing) should see stocks in the sector do well and vice versa

While this might work over the long term and for a while it suffers from the same weakness as Myth #7. That is that by the time, for example housing construction, is really strong it should already be factored into the share prices for building material and home building stocks and thus they might even start to start to anticipate a downturn.

Myth #9: Having a well diversified portfolio means that an investor is free to take on more risk

This mistake has been clearly evident in recent years. A common strategy has been to build up more diverse portfolios of investments less dependent on equities and with greater exposure to alternatives such as hedge funds, commodities, direct property, credit, infrastructure and timber. This generally led to a reduced exposure to truly defensive asset classes like government bonds. So in effect investors have actually been taking on more risk helped by the 'comfort' provided by greater diversification. Yes, there is a case for alternative assets. But unfortunately the events of the last two years have exposed the danger in allowing such an approach to drive an increased exposure to risky assets overall. Apart from government bonds and cash, virtually all assets have felt the blow torch of the global financial crisis, with agricultural investments being the latest victim in Australia.

Myth #10: Tax should be the key driver of investment decisions

For many the motivation to reduce tax is a key investment driver. But there is no point negatively gearing into an investment so as to get a tax refund if it always makes a loss. Similarly the recent experience with Managed Investment Schemes also highlights the danger in relying too much on tax considerations to drive investments. The first priority is to make sure that an investment stacks up well in its own right - without relying on tax considerations.

Myth #11: Experts can tell you where the market is going

Economic and investment forecasts are often seen as central to investing. But, at the risk of being thrown out of both the 'economists club' and the 'market strategists club', no one has a perfect crystal ball. And sometimes they are badly flawed. It is well known that when the consensus of experts' forecasts for key economic or investment indicators are compared to actual outcomes, they are often out by a wide margin. This was particularly the case last year. Forecasts for economic and investment indicators are useful, but need to be treated with care. If forecasting the investment markets was so easy then everyone would be rich and would have stopped doing it. The key value in investment experts' analysis and forecasts is to get a handle on all the issues surrounding an investment market and to understand what the consensus is. Experts are also useful in placing current events in their historical context, and this can provide valuable insights for investors in terms of the potential for the market going forward. This is far more valuable than simple forecasts as to where the ASX 200 will be in a year's time.

Conclusion

The myths cited here might appear logical and consistent with common sense, but they all suffer often fatal flaws which can lead investors into making the wrong decisions. The trick to successful investing is to recognise that markets (and economies) are highly complex, that they don't go in the same direction indefinitely, that markets are usually forward looking and that avoiding crowds is healthy.

Shane Oliver is head of investment strategy and chief economist, AMP Capital Investors

Drinking to good times and bad

Business Times - 06 Jun 2009

How is Asia Pacific Breweries' new chief executive coping with his move and the downturn? Roland Pirmez shares his views. By Emilyn Yap

ROLAND Pirmez can brew his own beer - he even has a master's degree in brewing to show for it. But these days, the chief executive of Asia Pacific Breweries (APB) barely has time for this pursuit. 'Don't spend time, just drink Tiger,' he says.

It is not surprising to hear Mr Pirmez cite Tiger - APB's flagship brew - as his favourite beer as well. The former head of Heineken Russia officially became APB's CEO in October last year. He took over from Koh Poh Tiong, who led APB for 15 years before moving on to helm the food and beverage division at parent company Fraser and Neave (F&N).

Growing up in Belgium has certainly helped Mr Pirmez cultivate a taste for all beers. From white, red, golden to lambic beers, over 450 varieties are available in the country. It is usual to drink beer even as an aperitif, he says. 'I'm a lucky guy. I'm producing a product in line with my culture and I enjoy it.'

But it is with a cup of espresso that Mr Pirmez settles down for the interview in his office at Alexandra Point. Alcohol may be his passion but he still needs caffeine at work. 'I need many espressos. It is well-known in the company that before meetings, I need my espresso or the meetings won't be nice,' he says with a smile.

Mild jokes aside, Mr Pirmez is serious when it comes to business. He joined APB just as one of the most severe economic downturns in Singapore's history was - and still is - unfolding.

So far, the company has held up well, living up to the notion that F&B businesses tend to be recession-resilient. For the second quarter ended March 31, 2009, APB even grew its net profit by 5.8 per cent from a year ago to $46.2 million. Its contribution to F&N is particularly important when the recession has weakened the conglomerate's property arm.

Mr Pirmez acknowledges that the beer industry is not as appealing during boom times. 'People are not drinking more beer. They are buying more cars, more TVs, holidays,' he says. 'But it's clear that when you have a recession, the beer industry is less affected than many other sectors. We start being a little bit more sexy.'

Nevertheless, APB is not completely immune to the downturn. The product of a long-time partnership between F&N and Heineken, APB has brewery operations across 12 Asia-Pacific countries and offers over 40 brands of beer in these markets. From Singapore to Mongolia, from India to New Zealand, the impact of the economic slowdown has been different.

'Globally, people are trending down,' Mr Pirmez observes. What this means is that consumers are switching from high-priced spirits to premium beers; from premium beers to mainstream beers; and from mainstream beers to economy brands. 'In terms of volume, we are less affected,' he says. 'But in terms of value, we are a bit affected.'

New Zealand was one of APB's weakest markets in Q2 2009. Falling consumption, coupled with stiff competition, higher packaging material costs and the falling New Zealand dollar drove profit before interest, taxation and exceptionals down by 78 per cent.

'A recession is not easy. You have to keep margins to continue investing in your brands, to manage cash flow better,' Mr Pirmez says. 'The good news for APB is that this is not the first time it is going through a recession. The management team has been through two or three crises. They have some experience, though it is never easy.'

Apart from the downturn, something else could be keeping Mr Pirmez up at night. 'You know the Blackberry - you can send emails at midnight and you have to answer emails three minutes after midnight. I tried to avoid it,' he says, but global connectivity has clearly won this fight. 'I have my Blackberry - somewhere.'

According to Mr Pirmez, the fast work culture here is one of the few differences between working in APB and Heineken. APB is also smaller, but it has the same professionalism and high standards for its brands, he adds.

So having worked in both Heineken and APB, how does he view the relationship between both companies, and between Heineken and APB's parent F&N? Are market rumours true, that Heineken has been frustrated with a 1931 agreement that allows it to set up breweries in Asia only through APB? Tension was particularly high in 2006, when Heineken went to court against F&N and APB over the right to appoint the chief executive for APB's China operations. The incident even sparked speculation that Heineken might take over APB or F&N.

Mr Pirmez is keen to first keep APB out of the picture. 'There is no relationship between Heineken and APB. APB has two major shareholders, Heineken and F&N. It's a relationship between two shareholders - Heineken and F&N.'

He then downplays talk of hostility among the various parties. 'It is a very, very old joint venture of 78 years,' he says of the agreement, proceeding to draw a sine curve in the air. 'Can you imagine a couple of 78 years, sometimes there are ups and downs.

'If I remember, two or three years ago, there was some tension between Heineken and F&N, but it has passed. The past is the past. Today there is no tension, there is a good relationship between the two shareholders.'

The former Heineken executive is no stranger to APB. Before his six-year stint in Heineken Russia, he was general manager at Thai Asia Pacific Brewery for four years. He believes APB hired him partly because of that experience.

'I had a lot of contact with Singapore, I had the opportunity to know the competitors, the management team. When I came back here it was not a new adventure,' he says.

Mr Pirmez's life does read like one big adventure so far. He has spent more than 20 years working in the beer industries of Africa, Thailand, Russia and now Singapore. His first overseas stint with a Belgium group Unibra in the Democratic Republic of the Congo (formerly known as Zaire) even coincided with the outbreak of civil wars.

'Somebody tried to kill me and my family - they didn't succeed,' he deadpans. He was married with three children when the conflicts occurred, and he now has five. 'I won't say it was a good experience but it was a learning experience. After this kind of experience, you look differently at your life. There is more sense of your priorities.'

But somehow, fleeing the region was not on top of Mr Pirmez's mind. In fact, he moved on to Angola to join Unibra's competitor Heineken as managing director. 'I don't know why,' he says of his decision then. 'Everybody who has worked in Africa loves Africa... It's amazing. The people talking badly about Africa, they've never worked in Africa.'

Mr Pirmez has come a long way for someone who grew up in a small quiet village. Surrounded by forests, it was almost 'natural' for him to develop an interest in agriculture, particularly in beer brewing, he says.

No more bad brews?

So what makes a good beer? 'Today, because of the sophistication of technology, because of the sustainable quality of the raw materials, you don't have bad quality beer. It does not exist anymore.

'What makes the difference between a good beer and a great beer is the patience that you put in. And I don't think that there are bad beers but there are different beers. That depends on the culture, the market, and many things.' Western markets in general have a larger variety of beers packaged innovatively, Mr Pirmez says. 'In Western Europe, beer is more for your own consumption - you enjoy your beer alone watching TV, so there is more choice in taste and packaging. That is the main difference.'

In Asia, however, it is the service that counts. 'When you drink beer in Asia, the brand experience is not only about the beer itself and the packaging - it's the full package. Asia is a beautiful place. There are amazing, charming ladies serving you with smiles, there is amazing food. In Asia, the way to drink is outside. The packaging is less important than in the Western world.'

Under Mr Koh's stewardship, APB went on a regionalisation drive and eventually grew its footprint in Asia. So far, Mr Pirmez has no plans to alter this path. 'When you have a newcomer, I don't think that you change your strategy like this. It's not good for a company, especially for a successful company.'

But not every market in the region has been rewarding - China, South Asia and Mongolia yielded operating losses in Q2 2009. While every serious corporate player wants to be in China, the operating environment there is also tough. 'We are a small player in China. Our strategy is to continue to develop as a small player.

'China is one of the main sources of growth in the region, so that's the good news,' Mr Pirmez says. 'The bad news is that it is a very competitive market, very, very competitive... All of the competitors are working with very, very low margins. I don't know a lot of foreign companies winning against China with margins.'

Nevertheless, other markets in the region have done well. Singapore, Papua New Guinea and Indochina enjoyed double-digit growth in profit before interest, taxation and exceptionals in the same period. Regional growth will remain on APB's cards, but the company will have to focus on its existing business because of the economic downturn, says Mr Pirmez.

'Definitely the short-term challenge for many companies is to get through the crisis and we will be very busy. After that you can start dreaming again of growth opportunities,' he says. 'The good news is, if you see the Asian market, it is one of the main sources of growth for businesses in the world. There are still a lot of opportunities. When you go through the timetable of what there is to do, you can stay for 15 years.'

Looks like Mr Pirmez will be busy brewing plans in the region for some time to come.

It pays to stay invested

Business Times - 06 Jun 2009

WEALTH INSIGHTS

When market recovers, emotional investors will be left with a portfolio of defensive assets and a truckload of regret

By Lim Beng Tat, Director Russel Investments Asia

WE ALL know equity markets rise and fall. However, the recent market correction has worn down many investors. Weary of asking 'have we reached the bottom yet?', investors want to know when the recovery will come. And unfortunately no one knows the answer to that.

To sit back and watch investments post negative returns is simply unbearable for many. The truth is there may be more value in 'inaction' for the smart and disciplined long-term investor. And experience tells us that decisions about money made under highly emotional circumstances rarely turn out to be good ones.

What we do know is that when equity markets do finally have a rally (as history has shown they do) investors who have chosen not to stay invested in equity markets risk missing out on a recovery that could help them recoup some of their market losses.

Towards the end of 2007 we witnessed one of the greatest bull markets of all time. Investors in the Singapore stock market had been riding a euphoric wave of double-digit equity market returns over the preceding five-year period as can be seen in Chart 1. Then 2008 arrived and the party was over.

In the last few years many 'emotional investors' who traditionally invested in more defensive assets (such as bonds and cash) transferred money over to equities blindly attracted to the apparent returns without considering the associated risks. When equity markets collapsed, these emotional investors started to realise that markets could go down as well as up.

Similarly, over attention to risk during the current market downturn has focused investor attention on minimising losses rather than waiting to participate in the recovery. As a result, these investors have oversold equities and transferred the proceeds into bonds and cash.

Investors have also held back from investing in equity markets in recent months because there is continued uncertainty and a seemingly never-ending run of bad news of corporate failures and bailouts.

However, what many of these investors have forgotten is that when market do recover, they will be left with a portfolio of defensive assets and a truckload of regret.

Although the current market volatility - triggered by the US housing slump and sub-prime mortgage crisis - has been a painful experience, investors can take some comfort in putting the recent downturn into perspective. If we step back and look at the performance of the Singapore market over the past five or six years, it is easy to appreciate the value of long-term investing and it is quite clear there will be another 'party'. We just don't know when.

The current bear market's intensity has been compared to the Great Depression and the bear market of 1973-74. The 1973-74 bear market created many jumpy equity investors. However, those who maintained their equity positions were well rewarded in the second-half of 1974 and the first quarter of 1975.

Charts 1 and 3 illustrate this fact and also show the different time periods where US and Singapore equity markets recorded strong negative returns. As you can see, periods where there are heavy losses on the markets are generally always followed by significant bounce backs.
What we do know is that markets can't go down forever. Although sometimes, in the middle of a strong downturn, it is hard to believe that markets will one day recover. While nobody can accurately predict when the bottom of the trough will be reached - or if indeed it has already - everybody knows that it will (sooner or later) arrive.

And when it does, it will pay to be invested. Some of the highest returns are experienced suddenly in an oversold, overshot market.

Give it some thought - as shown in Chart 1, the Singapore market experienced consecutive negative returns in 1997 and 1998. However in 1988, the market bounced back in a big way climbing close to 80 per cent. We saw it again from 2000 to 2002 and then in 2003 we saw returns of over 30 per cent.

While it may be tempting to simply convert equities into cash and bonds and watch from the sidelines, history tells us that investors selling to cash during falling markets can expect to see significant underperformance when equity markets return to health.

Yes we would all like to 'buy low and sell high' but the reality is that emotions work against this investment principal. While extended bear markets inevitably induce fear in investors - professionals and individuals alike - a disciplined approach can help minimise losses during the downswing and ensure readiness for the upswing.

Forecasting represents predictions of market prices and/or volume patterns utilising varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

The many issues of rights issues

Business Times - 06 Jun 2009

SHOW ME THE MONEY

During bear periods, they face different market reactions and possible abuses by controlling shareholders

By TEH HOOI LING, SENIOR CORRESPONDENT

COMPANIES worldwide are frantically raising cash to fill their coffers in preparation for a potentially long dry spell in the economic cycle. Combined, they have raised US$77.6 billion through rights issues from the start of this year to June 4, data compiled by Thomson Reuters shows. That's a 39 per cent jump from the same period a year ago. And last year itself was a record year, with a total of US$158 billion raised - a 124 per cent jump from 2007. In the last 12 months, corporations globally have raised US$180 billion.

The country where companies have raised the most through rights issues is the United Kingdom. Sixteen companies there tapped existing shareholders for a total of US$26.5 billion. They accounted for about a third of the amount raised through rights issues worldwide. Australia came in second, with US$10.2 billion raised.

And Singapore has definitely punched above its weight in terms of rights issue funds raised so far this year. In the past 12 months, corporate Singapore has tapped shareholders for US$7.3 billion. Companies here have tapped the market for just under US$6 billion this year - six times the amount raised during same period last year. The Republic is ranked fourth, behind France with US$6.2 billion raised this year.

Among the big fund raisers are CapitaLand and CapitaMall Trust, Keppel Land and NOL, which announced its rights issue this week. Earlier in the year, when market sentiment was still bearish, companies that announced rights issues were punished by having their shares sold down.

I looked at seven companies that announced rights issues earlier in the year - Ascendas Reit, HG Metal, CapitaLand, Osim, CapitaMall Trust, Bukit Sembawang and Chartered Semiconductor. These stocks under-performed the Straits Times Index significantly after announcing their issues. Two days after the announcement, the average under-performance was a hefty 10 percentage points. Chartered Semicon's rights issue got the roughest reception. On March 9, when talk of a rights issue hit the market, Chartered's stock under-performed the STI by 14.3 percentage points. The statement was then loaded on to the SGX website at 8.45pm that day. The following day, the stock under-performed by 41 percentage points. And on the two days after, it continued to under-perform - by 9.3 and eight percentage points respectively.

The notable exception among big-cap fund raisers is CapitaLand. Its share price surged after its rights issue was announced. Probably, the market heaved a sigh of relief, as talk of an issue had been circulating and weighed heavily on the share price. On the day the issue was announced, CapitaLand's stock out-performed the STI by 10 percentage points.

I also looked at seven companies that announced rights issues last year - K-Reit, Olam, Parkway, Mapletree Logistics Trust, KS Energy, Popular and DBS Group. Two days after news of their cash calls was released, these stocks fared 9 percentage points worse than the STI. I did a similar study for the years 2000 and 2002 - and the findings were similar.

Sharp readers would have noticed that the periods mentioned above were all bear phases. Indeed, now that sentiment has turned, rights issues are welcomed by investors. For example, when NOL announced its rights issue on Tuesday this week, its stock outperformed the STI by 10 percentage points. And the next day, it outpaced the market again, by another 3.8 percentage points.

The other form of fund raising - via private placement - exhibited slightly different stock price patterns. In the days prior to a placement announcement, the stock price usually ran up noticeably. But when the news was out, the stock would slump.

From an existing shareholder's perspective, under normal circumstances, a rights issue is preferred over a placement if the shares are issued at a discount. New placements at a discount to new shareholders disadvantage existing shareholders - their stake would be diluted without any compensation.

However, there could be cases of existing minority shareholders being forced to pump in good money after bad when a company launches a rights issue. The minority shareholders are 'forced' to subscribe if the rights are offered at a very deep discount to the then-market price of the shares. Management or the majority shareholders have incentives to raise new funds to prolong the life of the company, even when it is obvious that it doesn't have a competitive edge and is losing money. By launching a rights issue at a deep discount, in anticipation of the sell-down of the shares upon the announcement of the issue, management and majority shareholders are in effect 'forcing' minority shareholders to pump in new money, which would be against their interest.

The more a controlling shareholder expects the market reaction to be negative, the more he will be willing to 'force' the market to underwrite it by making use of higher levels of discount, note Michele Meoli and Stefano Paleari of Bergamo University in Italy and Giovanni Urga of Cass Business School, London (UK).

In their study, they analysed rights issues in Italy from 1996 to 2005 - and found evidence of abuse by companies in financial distress. They thus suggested a limit on the discount that a rights offer can be priced at.

As it happens, in Singapore, most of the big cap stocks have seen their share prices significantly out-perform the market subsequent to the rights issue. The notable exception is Chartered Semicon, whose share price under-performed the STI by some 30 percentage points from 10 days prior to the rights issue announcement.

Thoughts for the long run

Business Times - 03 Jun 2009

This crisis is not going to turn into a Great Depression as in terms of GDP, it will be similar to those of the 50s, 60s, 70s and 80s

OVERVIEW

JEREMY Siegel is a teacher and scholar who holds an endowed chair at one of the world's leading business schools, the Wharton School of the University of Pennsylvania. Yet, he is best known for his book Stocks for the Long Run. First published in 1994, the book is a financial bestseller and is now in its fourth edition. The Washington Post placed it on its list of the 10 best business books of all time.

Dr Siegel appears frequently on CNN, CNBC and National Public Radio. He writes a regular column for Kiplinger's and Yahoo Finance and has contributed articles to The Wall Street Journal and the Financial Times as well as other leading business publications. He spoke with Citi's chief investment officer Jeff Applegate and took questions from listeners in an April 8 conference call for investment professionals.

Mr Applegate: Reports have come out that stocks don't have nearly the advantage over bonds over the long term as often thought, and that there are long periods in which bonds outperformed stocks. Can they be right?

Dr Siegel: Well, if you calculate the 40-year return on stocks and bonds as of the March 9 low, government bonds did outperform. That's not true any more with the rally we just had in the stock market. Over the long term, stocks have about a three-percentage-point edge over bonds.

If there is a bubble going on right now, it's in US government bonds, which are sure to fall in value. This is absolutely the worst time to make the comparison between the returns on bonds and stocks.

Mr Applegate: Do you think March 9 was the low for the stock market?

Dr Siegel: I tend to believe that - but, certainly, I can't make that guarantee. If we assume it's the low, then the market was down more than 50 per cent from the peak. Once you've declined 50 per cent, investors are generally looking at 10-12 per cent gains a year, going ahead three to five years and sometimes much more. Now that the market has moved up, many will give up, saying: 'Gee, I already missed the first 25 per cent.' Don't feel bad about that! There's a lot more to go. And, actually, you're not out of the bear market until we've broken through a previous rally high, about 940 on the S&P 500.

Mr Applegate: Would your remarks about US equities extend to global equities as well?

Dr Siegel: Yes. We've all been amazed at how correlated world markets are. They're moving in sync. This happened in 1987, too. In a crisis, you don't get the benefit of diversification.

In terms of recovery, I am most optimistic about Asia. I'm least optimistic about Europe. The Europeans are saying this is a US problem and have been reluctant to lower rates as much as the US has done. I believe that they will come around and get their rates down to our level. Still, the fact is that they've delayed - meaning it's going to take longer to get out of the recession.

I'm optimistic about the emerging markets. They had become way overblown and got hit badly, but they've rallied nicely. They're up year to date, and we're not. China and India are not falling apart. Their currencies have stabilised after an initial decline, and their stock markets have stabilised, too.

Mr Applegate: You've written recently that the way in which earnings for the Standard & Poor's 500 Index is calculated distorts the picture. Can you explain?

Dr Siegel: When S&P computes aggregate earnings, it adds dollar for dollar the losses of any company to the gains of any other, without any regard for the market value of these companies. On its website, S&P says it looks at the S&P 500 as 500 divisions of a single company, and the losses of one cancel out the gains of another.

That is absolutely wrong. Clearly, the losses of one firm don't cancel out the gains of another if they're separate firms. AIG had a 2008 loss of US$95 billion that was more than twice the total profits of Exxon Mobil. AIG had a market value of US$15 billion while Exxon Mobil was almost US$400 billion; yet, S&P says that all Exxon Mobil's profits are cancelled out. If you held a market-weighted portfolio of both those stocks, 95 per cent of your money would be in the oil company, yet S&P would say your portfolio didn't have any earnings.

The point of this is that if you correct S&P earnings for market value of the companies reporting those earnings, you don't get anywhere near the terrible earnings that you do when you add all these financial losses together with the gains. AIG shouldn't even be in the S&P 500 anymore. If you took it out, S&P earnings would go up by US$10 a share.

Mr Applegate: Many people believe all the money that is getting pumped into the economy will cause inflation. Do you agree?

Dr Siegel: No, because I do believe that the Federal Reserve will pull back as necessary when the economy recovers. The board members understand their charge, which is to keep prices within a stable range. They must also prevent deflation because, when we look back at the 1930s, it was, in fact, the tremendous collapse in prices - the Consumer Price Index went down 35 per cent between 1929 and 1934 - that essentially bankrupted everybody who was in debt. In real terms, debts rose by more than one-third.

Of course, the Fed is also working to prevent a breakdown of the banking system - which did collapse in the 1930s when the Fed did nothing to prevent it. That is equally as important as preventing deflation.

All these policies are the reason why this tremendous financial crisis is not going to turn into a Great Depression. In terms of GDP (gross domestic product), this recession will be similar to those of the 50s, 60s, 70s and 80s. The problem is that everyone got used to the light recessions of 1990, 1991 and 2001 and thought we were in a new world of very low economic volatility. That is one of the factors that, in fact, encouraged all the risk taking that led to this crisis.

Mr Applegate: Is there anything that can be done if you are worried about inflation?

Dr Siegel: Get a home and lock in your 30-year fixed-rate mortgage at less than 5 per cent. If you pay a reasonable price now, you have hedged yourself and your investment against all that liquidity that we see going forward.

Mr Applegate: So you think real estate prices have bottomed?

Dr Siegel: Very near. It's still got farther down to go, but not too much. There are two prices now, there's the buyer's bid price on a lot of stuff and then there's the ask price by the sellers. Sellers are slowly coming to the realisation that if they want to sell, they're going to have to get much closer to those bid prices.

Look at the Affordability Index that is put out by the National Association of Homebuilders. It measures the degree to which the average family can afford to buy the average home - given their income, given the price of homes and given the interest rate. By this index, real estate has rarely, if ever, been more affordable for the average family to buy the average home. That is, in large part, due to the very low interest rates.

The interview was first published in May issue of Citi Private Bank's 'The View'. Opinions expressed herein should be regarded solely as general market commentary, and may change without prior notice. Past performance is no guarantee of future results.