Week In Review: 26 Nov 2017

The following hourly chart of FBMKLCI shows that there are some level of support @ 1,716. Last Friday, the index managed to close just above the support line. Any further dip below 1,716 will reinforce a bearish theme for the Malaysian index.

KLCI

The following hourly chart of SAPNRG has shown that the stock has stayed below its key resistance point of $1.38. Immediate positive or negative catalyst will be the outcome of the OPEC meeting to be held on 30 Nov 2017.

SAPNRG_26112017.jpeg

If there is no further commitment for production cut by the OPEC, the Brent may appear to be in an ‘overbought’ (or “overextended) position.

BRENT_NYMEX.WLD.jpeg

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE STRICTLY FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES.

Ringgit fairly valued?

KUALA LUMPUR: The ringgit is ”far from reflecting its fair value,” Bank Negara governor said, signalling a desire for the exchange rate to build on its recovery from a sharp selloff last year.

The ringgit is currently trading at its highest in over a year against the dollar, after a torrid 2016 when it ranked as one of Asia’s worst performing currencies.

The ringgit, like some other emerging market currencies, took a hit after Donald Trump won the US presidential race.

Investors feared a rush of capital out of many emerging economies on the view Trump’s policies could prompt a faster pace of US interest rate increases. “The ringgit is now priced more efficiently and increasingly more reflective of Malaysia’s strong fundamentals,” as the influence of external factors have waned, governor Tan Sri Muhammad Ibrahim said in a speech on Friday. A text of the speech was published by the central bank on Monday.

“Nevertheless, questions remain as to why the ringgit is far from reflecting its fair value,” he said. He also announced new measures to boost liquidity in the onshore ringgit market. These include extending the short-selling framework to include Malaysian Government Investment Issue, expand eligible collateral for banks’ liquidity operations, and introduce Bank Negara Interbank Bills (BNIBs) in ringgit and foreign currencies.

Last November, as the ringgit plunged to its weakest in more than 12 years in offshore markets, Bank Negara demanded that banks sign a commitment to cease trading the local currency on the offshore non-deliverable forward market.

Read more at https://www.thestar.com.my/business/business-news/2017/11/20/bank-negara-governor-says-ringgit-is-not-fairly-valued/#Q6I1h28UkaTHtJFe.99

Is Ringgit or MYR fairly valued?

There is a positive correlation between the Malaysian Ringgit and Brent (USD). Since Malaysia is a net oil exporter, positive movements in Brent are envisaged to translate into positive movements in the Ringgit (although this may not be the case at times – as shown below, there appears to be certain divergent zones).

MYR vs Brent.png

The following simple regression analysis highlights a relatively low r-square (i.e the data are not close to the fitted regression line).

Regression Analysis.png

Based on the above regression results (strictly for illustrative purposes only), it appears that there is potentially ‘more upside’ in the Ringgit (since the forecast MYR is higher than the actual value given the current brent crude price).

Actual vs Forecast USDMYR (1 Jan 2015 - 22 Nov 2017).png

The following desktop scenario analysis further highlights the potential undervaluation of the Ringgit. Given the variability of the currency and a low r-square (associated with the regression analysis), it is important to note that the 95% confidence interval is estimated to be between $3.499 and $4.483.

Scenario Analysis.png

It is important to note that the movements in a currency are impacted by numerous macro and specific factors (not limiting to the one single factor, e.g Brent, etc). 

 

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE STRICTLY FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES.

Betting On Fallen

Latest news – Shares of Sapura Energy tumbled more than 9% in early Thursday trade following report that Tan Sri Mokhzani Mahathir is disposing off his entire stake in oil and gas services company. This is the second time Mokhzani is offloading its stake in an oil and gas firm. In 2015, Mokhzani’s private vehicle, Khasera Baru Sdn Bhd sold off a block of 190.3 million shares in SapuraKencana Petroleum Bhd for close to RM820mil in total.

Industry players said Mokhzani’s exit did not come as a surprise. They added that Mokhzani believed the oil and gas industry was a global issue and prefers to redeploy his resources in other investments. 

Mokhzani through Khasera Baru has a 10.10% stake in Sapura Energy. According to a term sheet, Mokhzani is looking to sell up to RM905.1mil of Sapura Energy shares. The bookbuilding range for the offer represents 605 million Sapura Energy shares was between RM1.42 and RM1.49 a share.

The price range represents an 8% to 12.3% discount to Sapura Energy’s closing price of RM1.62 on Wednesday ahead of the bookbuilding launch. Khasera Baru will not own any Sapura Energy shares after the sale. 
Read more at http://www.thestar.com.my/business/business-news/2017/11/02/sapura-energy-tumbles-9pc-in-early-trade/#zLhAuhfLVUKh4pbF.99

My 2-cent thoughts – I am not surprised that Tan Sri Mokhzani will make an exit due to current political friction. Without zooming into the company fundamentals, is Sapura Energy currently in an oversold position?

Sapura Energy has always been a close proxy to the Brent (USD) (as shown in the graph below – since 1 Jan 2014):

SAPE vs Brent _2 Nov 2017.png

A simple regression analysis shows that there is a strong statistical relationship between SAPE and Brent (USD). The current share price of SAPE of RM1.48 is relatively lower than forecast share price of RM2.35 and is even lower than the 95% confidence interval range of RM1.65 and RM3.04.

Forecast SAPE.png

Scenario Analysis

Based on the regression relationship, the following is a simple sensitivity analysis of the SAPE share price based on Brent (USD):

Sensivity Analysis.png

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE STRICTLY FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES.

Waiting For Brent To Tank

Latest news: Oil is trading in bear market territory, with prices falling to their lowest level this year as rising supplies threaten to derail an effort by some of the world’s biggest producers to bring an end to a three-year glut. Renewed concerns about growing production from within the Opec cartel and a reinvigorated US shale industry took global crude benchmarks on Tuesday to the lowest level since mid-November with Brent crude sinking to $46 a barrel. Prices at one point during the session were down more than 20 per cent from levels at the start of 2017. A decline of more than 20 per cent from the most recent high is typically considered a bear market. Crude has now erased all its gains since late last year, when Opec and other producer countries, including Russia, agreed to cut output by 1.8m barrels a day for the first six months of 2017. A decision in May to extend the original six-month deal for a further nine months has not helped lift sentiment as a growing chorus of traders and analysts question the effectiveness of the supply curbs.

Price of Brent crude on Tuesday

Brent crude, the international benchmark, fell 89 cents, or almost 2 per cent, to settle at $46.02 a barrel, the weakest level since November 15. West Texas Intermediate, the US marker, dropped by 97 cents to a nine-month low of $43.23 a barrel, down by more than 20 per cent from a February peak.

Brent Graph.png

Two questions – (1) where is the bottom for brent? (2) what would you do when Brent tanks to the bottom? Continue reading “Waiting For Brent To Tank”

Random Charts : Inflation & Markets

Malaysia central bank sees inflation exceeding 8-year high

The recent spike in Malaysia’s inflation rate  to above the 4.5 per cent rate, is possibly attributable to increased crude prices as well as prevailing weakness in Ringgit. The following charts show the correlation:

Inflation vs Brent

Inflation vs USDMYR.png

Rising inflation will lead to rising yield in the debt markets:

Inflation vs MGS

What does this mean for equity market? Before 2013, debt yield has negative relationship with performance of stock market (i.e in a declining debt yield environment, the stock market tends to do better). Post-2013 onwards, we are seeing a rather mixed relationship between the two markets. Nevertheless, in general, a rising debt yield would tend to mean people would expect a higher return for equity market and as such, this would translate to lower prices for the equity market.

MGS vs KCI

Would inflation continue to rise?

Based on forecast model by TradingEconomics, inflation may have potential mean reversion and may adjust to a lower range of 3.2% – 3.6% by Q3-Q4 of year 2017:

Forecast Inflation.png

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES.

FBMKLCI vs Brent Crude (Updated)

News Update: 

Oil prices fell to almost four-month lows on Wednesday after data showed U.S. crude inventories rising faster than expected, piling pressure on OPEC to extend output cuts beyond June.

The American Petroleum Institute said late Tuesday that U.S. inventories climbed by 4.5 million barrels to 533.6 million last week, outpacing analyst forecasts of 2.8 million.

Investors now want to see whether Wednesday’s figures from the U.S. Energy Information Administration confirm the rise. EIA will release its report at 10:30 a.m. EDT (9:30 a.m. ET).

“With U.S. crude stocks continuing to mount into record territory both in total and at Cushing following almost two months of OPEC production restraint, we feel that the odds of a gradual unraveling in the OPEC agreement have been increased significantly,” Jim Ritterbusch, president of Chicago-based energy advisory firm Ritterbusch & Associates, said in a note.

Global benchmark Brent futures for May delivery were down 59 cents, or 1.1 per cent, at $50.37 a barrel by 9:48 a.m. ET. Earlier the contract fell as low as $50.05, its lowest since Nov. 30 when OPEC countries agreed to cut output.

On its first day as the front-month, U.S. West Texas Intermediate (WTI) crude futures for May were down 53 cents, or 1.1 per cent, at $47.71 per barrel.

“A look below $50 (for Brent) is quite possible today if (EIA) data show a similar pattern, but it’s impossible to say how far below $50,” Commerzbank analyst Carsten Fritsch said.

A deal between the Organization of the Petroleum Exporting Countries and some non-OPEC producers to reduce output by 1.8 million barrels per day (bpd) in the first half of 2017 has had little impact on bulging global stockpiles of oil.

OPEC, which sources say is increasingly leaning toward extending cuts, has broadly delivered on pledged reductions so far, but non-OPEC states have yet to cut fully in line with commitments.

“OPEC has used up most of its arsenal of verbal weapons to support the market. One hundred per cent compliance by all is the only tool they have left and on that account they are struggling,” said Ole Hansen, head of commodity strategy at Saxo Bank.

U.S. shale oil producers have been adding rigs, pushing up the country’s weekly oil production to about 9.1 million bpd for the week ended March 10, up from an average of 8.9 million bpd for calendar 2016, according to U.S. energy data.

“OPEC’s market intervention has not yet resulted in significant visible inventory drawdowns, and the financial markets have lost patience,” U.S. bank Jefferies said in a note.

But the bank said the market was undersupplied and, if OPEC extended cuts into the second half, inventories would draw down and prices recover above $60 in the fourth quarter.

However, it said U.S. crude production was expected to grow by 360,000 bpd in 2017 and 1 million bpd in 2018, and a price recovery could spur more U.S. shale activity.

Source – read more

Clearly, we are not seeing an optimistic view for the brent crude oil. Further, downside risk for brent still prevails. How does this impact on Malaysia’s FBMKLCI stock index?

Generally, there is a positive correlation between FBMKLCI and Brent. Nevertheless, lately, we are seeing a “divergence” whereby FBMKLCI has been rising whilst brent has been declining.

B v K.png

Given the bearish prevailing sentiment for brent, is Malaysia’s FBMKLCI’s overstretched?

0200I.MY.jpeg

The following table shows the updated regression analysis between FBMKLCI and brent (since June 2014), whereby there is significant statistical relationship between FBMKLCI / brent:

Relationship_March 2017.png

Currently, the actual FBMKLCI exceeds its forecast value of 1,697 points but nevertheless it is within the 95%-confidence interval of between 1,601 – 1,792.

FKLCIvsBrent_Graph.png

Based on the regression relationships, the following table shows the possible forecast range of FBMKLCI based on the movements in brent crude (USD) (USD25 – USD62.50):

Forecast Range.png

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES.

FBMKLCI vs Brent

Higher level of correlation between FBMKLCI and Brent Crude Oil. FBMKLCI appears to be rising in tandem with a rising Brent.


Question : Would there be further rise in FBMKLCI if Brent continues to rise given the heightened geopolitical risks?

It’s ambitious to think that oil prices could reach $65: IEA http://www.cnbc.com/id/104259621


DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN
INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES.