By Evelyn Yong | 04 March 2019

ETF stands for an exchange-traded fund. It is an open-ended investment fund listed and traded on a stock exchange. There are 3 types of ETFs listed in Bursa Market, which are equity ETFs, fixed income ETFs and commodity ETFs. In Malaysia, the ETFs were managed under licensed asset management companies like Affin Hwang Asset Management Berhad, AmFunds Management Berhad, CIMB Principal Asset Management Berhad and i-VCAP Management Sdn Bhd.

Diversified Exposure

ETF combines the features of an Index fund and a stock, which you able to invest to a counter with various stocks or bonds or commodities included. The features offer you to gain exposure to a geographical region, market, industry, commodity or even specific investment style such as growth or value. For example, MYETF DOW JONES U.S. TITANS 50 (0827EA) is a Shariah-compliant equity ETF traded in US Dollar. It comprising the 50 largest companies listed on NYSE and Nasdaq. It is good for investors who like to diversify their capital in US market with just buying the ETF. Another example, CIMB FTSE ASEAN 40 MALAYSIA (0822EA) consists of 40 constituent stocks from 5 ASEAN countries namely Singapore, Malaysia, Thailand, Indonesia and the Philippines. Investors who like to diversify their capital throughout ASEAN countries, this ETF provides a good simplified solution.

Controllability

The combination basket of stock inside the ETF is predetermined and will be managed by the fund manager through the market. Once the transaction successful, the investor will become one of the unitholders of the fund. The controllability of an investor is just the same as holding a stock counter, can sell whenever it worth to sell and buy whenever it worth to buy with personal judgement.

Liquidity

The liquidity of an ETF relies on a combination of primary and secondary factors. The primary factors include the composition of the ETF and the trading volume of the underlying assets. ETFs can be invested in some asset types including real estate, fixed income, equities, commodities and futures. Within the equity universe, ETFs can focus on different market capital size and different level of risk. With the diverse selection of the ETF’s focus, the liquidity will be affected. Besides, the trading volume of underlying individual stocks does matter too. The more actively traded particular security is, the more liquid it is.

Secondary factors are the trading volume of the ETF itself and also the investment environment.  Taking an example to compare CIMBC50 with ABFMY1, CIMBC50 will get higher liquidity as more investors trading on. Due to trading activity is a direct reflection of the supply and demand for financial securities, the trading environment will also affect the liquidity. As Malaysia ETF market is not mature yet, investors could hardly to sell off their ETF at the desired price and make a big spread. Hence, it is more advised for a long-term investment for ETFs to trade on Bursa Exchange.

Transparency

The list of the ETF constituents will be updated on the ETF’s website by daily basis. Hence, investors can accurately know the current stocks or underlying assets been held within the ETF.

Conclusion

Overall, ETF is a financial product made up with the concept of a mutual fund but been sold or traded like a stock on the exchange. An investor can consider ETFs to diversify their portfolio and reduce their profile risk at a lower cost. However, for traders, ETFs are not that advisable as lower trading volume compared to stocks or commodities assets.

A comparison table between ETF with stocks and unit trust has been prepared and listed below.

By Stella Goh – Market Data Analyst | 26 July 2018

The stock market could be one of the valuable investment tools. However, some people may be reluctant to invest in the stock market because the fear of possible significant losses occurred due to the uncertainty and riskiness of the stock market. The risks associated with the stock market is not fully understood. Wise investors will always seek to minimise their risk as much as possible without diluting the potential of rewards. Let us look at the 3 significant risks faced by investors and the ways to avoid it.

Market Risk

Market risks is a type of systematic risk that may cause investors to suffer losses due to the factors affecting the financial market’s overall performances, such as stock market bubbles, recession and so on. When there is a decline in the stock market, all the stocks would be affected regardless if they are large cap, small cap, mid-cap, growth stock, etc. This kind of risk cannot be diversified away, but investors can reduce the market risk by using tools such as portfolio construction. The examples, investors can protect themselves by investing in different types of securities such as stocks of both large or small companies, or bonds from both corporate and government issuers.

Business Risk

Business risk happens to the company when there is a new competition, or unexpected events occurred causing the company to suffer loss rather than earning a profit. This risk may occur due to several reasons such as disappointing earnings reports, change in leadership, outdated products, wrongdoing within the company, competitions, government regulations, overall economic climate, etc.

We frequently see such scenario, that when a specific company is facing any problematic event, the news will spread across to various media platforms. Therefore, the negative sentiment will be aroused and causes the shares price of the company drop. However, the other business with the same industry may not be affected and could be even profitable from it. To lower the exposure to the business risk, investors can invest in different companies categorised by sector.

Liquidity Risk

Liquidity risk arises when the investment is lack of buyer and seller in the open market. This type of risk will become higher when some investors wish to cash out their investment. Investors may find it hard to convert the assets into cash without incurred some loss due to widening spread on pricing.

Diversification in an investment portfolio can help investors to reduce the liquidity risk. Investors can diversify their portfolio that consists of investment that has higher liquidity such as top 30 KL Index stock with some lesser known potential growth companies stock or bonds. Therefore, investors should always keep enough for his liquid asset to cover their short-term obligations. The practice will allow them to sell their long-term investments when they have risen in value, not when they desperate for cash and may need to take a loss or limit their profit.

There is a way to evaluate the liquidity of an asset before purchase. Investors can observe the bid-ask spread of the stock over time. Illiquid assets will have a wider of bid-ask spread relative to other assets. The narrower the bid-ask spread and the higher of volume indicate that there is a higher of liquidity.

Conclusion

The common saying of high-risk, high return only reflects a gambler’s mindset. As a seasoned investor, one should minimise the risk and maximise the profit growth. To do so, each investor should spend the time to equip themselves with relevant knowledge and skills. Just like the teaching of Sun Tzu, “To Know One’s Own Strength And The Enemy’s Is The Sure Way To Victory”. Thus, maximum and continuous profits come from well versed with the market.

By Evelyn Yong | 19 July 2018

Due to the high liquidity and low cost of trading, a lot of investors will opt to trade in derivatives market especially Futures Crude Palm Oil. FCPO is one of the popular derivatives traded in Bursa Malaysia market, and most of the traders are focusing on technical analysis and market news or arbitraging. However, the fundamental part should not be neglect as it can be a decisive factor to determine the market trend as well.

1. Weather Season
2. The Festive Season
3. Competition from producing Country
4. Competition from other edible oils
5. Tariff & Policies

Weather and Season Factor

The plantation of Palm Oil Tree follows their specific season and period. The whole process from planting to harvesting takes up to 4 years, and the lifespan of the tree can be up to 25 years. Palm Oil Tree requires warm weather with high humidity environment to grow up healthily as too much rainfall could flood the plantations and hamper the harvesting and dry spell would affect the plants’ growth thus lowering the production. For example, the El Nino effect influenced Malaysia’s palm oil yield in 2016. The production dropped to 3.12 tonnes per hectares which the lowest of these years (average 3.7 and above). Hence, drought or flood season can affect the yield of palm oil which the lower the production translate to a higher the palm oil price in the market.

The Festive Season

The festive season can increase the demand for oil. For example, Chinese buys for the Lunar New Year holidays, Indian buys for Deepavali while Pakistan, Bangladesh and Middle East countries buy for Eid. People use it for the religious praying purpose. With the high demand for oil use, the price will increase too.

Other than the festive season, China, India and Europe are among the largest importers of palm oil. While crisis arises in those countries like eurozone debt crisis, slowing food demand and global economic downturn, it can lead to a decrease in demand for palm oil. The consequences can cause the supply more than demand which can lower the palm oil price.

On the other hand, the short of labour on harvesting the palm fruit will affect the supply to the market too. Recently, nearly 70% of the palm industry’s workforce has extended their holiday and delaying the palm fruit harvest. There is expected a 5% to 8% drop in production due to losses of overripe fruit. Harvest the palm fruit on time can make sure the quality of palm oil and also avoid the production overcapacity or lack of supply which can affect the price.

Competitor – Indonesia

The production of palm oil in Malaysia and Indonesia has taken up around 90% of the supply to the world. Malaysia is currently the second largest palm oil exporter in the world who is surpassing by Indonesia in 2006. Indonesia expects to double their production by the end of 2030. While Indonesia keeps increasing the output, it can cause the price decrease, and the profit margin of Malaysia can be affected. Or there might be another situation is if Indonesia can supply most of the demanders in the market and with better tariff rate, Malaysia will lose our competitive ability or been forced to sell at a lower price.

Competitor- Prices of Vegetable Oils

The price of palm oil can be affected by other vegetable oils like sunflower oil, rapeseed oil, corn oil and especially soybean oil. When the bad weather falls on the soybean plantation, it can help in increasing palm oil prices. US, Brasil and Argentina are soybean producer countries, once their oil supply is below the market needs, palm oil will be the substitution.

Other than that, China is a world biggest oil-import country, when those countries have a massive production on vegetable oil like early of this year which had lower down the price of vegetable oils, China has tended to import vegetable oil instead of palm oil. The data has shown that China might break their record on the amount of vegetable oil importation. Hence, there is an inverted relationship between the vegetable oil and palm oil.

Tariff and Policies

Malaysia relies on exporting to build up the country’s economy. Hence, to hit the GDP higher government may lower down the tax rate to help in strengthening the exports and reduce the inventory level. This action can make the liquidity if the market higher which is more favourable to traders.

Besides, the tariff issue of the importing countries can suffer the palm oil producer. India is the world second largest oil-import country, and they rely on imports for 70% of its edible oil consumption. Early of this year, they had raised their import duty on crude and refined palm oil to the highest level in more than a decade which up to 54% to protect their local farmers. With this action implemented, it has forced a palm oil producer country to compete with local farmers in business.

Australia had proposed a bill of enforcing labelling palm oil as a product ingredient instead of vegetable oil. It was due to boycott as they believe palm oil plantations have contributed to deforestation. With the lower demand for palm oil-based products, therefore, affecting the palm oil price to go lower.

Conclusion

FCPO trading should not only focus on technical trade as the fundamental factors can affect the price trend. Other than the factors listed above, there is still another factor like Ringgit exchange rate. A fall in the Ringgit makes the price attractive to foreign buyers and therefore increased demand from them will raise the FCPO price. Hence, FCPO traders should not only focus on the chart but more on the essential factors of the palm oil.

By Stella Goh – Market Data Analyst | 20 June 2018

Candlestick charts are perhaps the most popular financial chart which assists investors to predict the price movement of their securities. Swing traders have internationally used it to understand how the price of the stock has changed over a specified period. There are dozens of bullish reversal candlestick patterns and this time we will focus on few popular bullish candlestick patterns.

Bullish Abandoned Baby

Bullish Abandoned Baby is a type of candlestick which use by technical analyst to signal a reversal in the current trend. It can also be known as a rare form of morning Doji star. There are three distinct of candlesticks to make up this bullish abandoned baby. The first candle will be the red candle which located in a downtrend, followed by a Doji. There is a gap below the two adjacent candle shadows. The following candle will be a white candle which uses to indicate the strong bullish sentiment.

Bullish Engulfing Candlestick

Bullish Engulfing Candlestick chart formed when there is a large white candlestick fully cover the smaller previous black candlestick without regards to the length of the tails shadow. This type of candlestick will usually happen during a downtrend, found some support or buying volume, and then it will be made a bullish move back up by breaking the previous day’s high. It will be indicating that there is a potential reversal and it is also the signal of the beginning of a bullish trend in the security.

When there is a bullish engulfing candle form at the end of a downtrend, the reversal is much more powerful as this will represent a capitulation bottom. The lows of the candle should be the lows of the downtrend. There shall precede by a minimum of 4 consecutive lower low candles which should close near to the candle highs before the bullish engulfing candle.

Three White Soldiers

Three White Soldiers pattern consist of three consecutive large bullish candles that open within the previous candle’s real body and close that exceeds the last candle’s high. There is no gap between the candles, and do not have very long shadows open within the real body of the other candle.

When this frenzy buying continues third days, three white candles will be formed side by side with higher highs and higher lows. It signifies that the increased in the momentum in the ongoing of bullish phase.

Bullish Hammer

Hammer candlestick is just made up of only one candle and it may occur at the bottom of a downtrend. The candle looks like a hammer with an extended lower wick and short body at the top which is a sign of the sellers are driving the prices lower during the trading session and followed by strong buying pressure to end up market close higher or near to opening price.

Morning Doji Star

A Morning Doji Star is formed when the first candlestick is a long and bearish black candle, followed by a Doji that gapped below it, and then the third candle will be a white candle. If the penetration of the third candle is over 50%, it will be indicating that this pattern has much higher success rate. Morning Doji Star is a strong bullish price reversal candlestick pattern which appears at the end of a downtrend which will turn the current downtrend into the upwards direction.

Conclusion 

While fundamental analysis helps investors to select the potential stocks, the technical analysis allows investors to determine when is the best time to buy and sell. Candlesticks pattern are an excellent way to read the current market sentiment. Combination of both pieces of knowledge will significantly help investors to survive in the volatile market.

By Evelyn Yong | 13 June 2018

A warrant is a security that gives holders confers the right, but not the obligation to buy or sell a specific underlying asset at an agreed price (strike price) on the expiry date. The price movement of the warrant is usually much greater than the underlying share. Hence, investors may expose themselves in higher volatility price movement due to leveraging positions in warrants.

There are 2 exercise styles for warrants, American style and European style. An American style warrant can be exercised at any time within the period before the expiration date, while European style warrant can only be exercised on the day of the expiration date. In Malaysia, we only practice the American style of warrants.

There is 2 type of warrant traded in Malaysia, which are company warrant and a structured warrant.

Company warrant

Company warrant also called as a stock warrant. It is issued by the listed company itself to raise money. It gives you the right to purchase a company’s stock at a specific price within the contract period. Once holders choose to exercise the warrants, new shares will be issued by the company for the transaction.

The validity period for company warrant can up to 10 years and determined by the issuance company. Once new shares were issued, the total company shares will increase and earning per share will be reduced. This situation makes existing stockholder owns a smaller or diluted percentage of the company. Issuing warrants can help to lower down the financing cost for the company(as raise capital through issuing instead of borrowing) as well as secure the additional capital if the stock does well.

Company warrant can be found in Bursa market with the stock code followed by –WA or WB or WC. ‘W’ stands for the representative code of company warrant while the ‘A/B/C’ is the series of the warrants issued and it can up to ‘Z’ depends on the company issuance. A company warrant price is usually lower than its mother share price and has listed the conversion ratio for exchanging into 1 share. The said of buying warrant can be volatile mostly due to the gearing ratio. When the gearing ratio is high, it will reflect higher changes on the warrant when the price of mother share is increasing or decreasing. When investors expect there is appreciation on company future value, they will purchase the company warrant which is lower cost at the same time minimises the loss if the share price drop.

Structured warrant

The structured warrant also named as an exchange-traded option or stock option and issued by financial institutions. The structured warrant settlement is in cash and does not involve any mother share. In Malaysia, there are 6 licensed issuers which are AmBank Berhad, CIMB Bank Berhad, Kenanga Investment Bank Berhad, Maybank Investment Bank Berhad, Macquarie Capital Securities (Malaysia) Sdn Bhd and RHB Investment Bank. The objective of having a structured warrant is to create the capital liquidity in the market as the price of the warrant is just a fraction of its underlying share. The issuer aims to make a profit on the risk management of the warrants sold, in doing so they also take on risk. When issuers sell warrants, they will buy shares or other derivatives to hedge their positions and attempt to capture a margin spread regardless the share price goes up or down.

Structured warrant separated into call warrant and put warrant. A call warrant gives the right but not obligation to buy the underlying asset at the fixed exercise price within the limited period of time. It will increase in value when the price of the underlying asset goes up due to the gearing ratio effect. If the settlement price of the underlying is above the strike price at expiry, the call warrant is deemed to be “in-the-money” (profit) and the holder will receive a cash payment. Otherwise, the warrant will expire worthless.

Put warrant gives the right but not obligation to sell the underlying asset at the fixed exercise price within a limited period. The value of put warrant will increase when the price of the underlying asset goes down. Put warrant price will inversely differ from the movement of the underlying asset. When the settlement price of the underlying is below the strike price at expiry, the put warrant is deemed to be “in-the-money” and the holder will receive a cash payment. Otherwise, the warrant will expire worthless too.

So the value of the structured warrant will be much valuable when in longer maturity date compare to shorter validity, which deemed to have a higher risk. Below illustrated the different company warrant and a structured warrant.

Company Warrant vs Structured Warrant