Short Position

Seeking sanctuary in gold

NEVER before in recent history have central banks bought so much gold. The trend to buy gold to be stored as reserves is led by the central banks of Poland, Russia and China.

These countries strive to diversify their reserves away from the US dollar, which should weaken in the future.

According to the World Gold Council (WGC), central banks have scooped up more gold than ever in the last six months since 1971 when the precious commodity was linked to the value of a country’s currency.

A combination of geopolitical uncertainties in the Middle East, Brexit in the United Kingdom, turmoil in Hong Kong and escalating trade war between the United States and China drove central banks to take shelter in gold. The declining interest rates in the United States is another factor contributing to the demand for gold.

Gold is a seen as a defensive asset where its value remains steady amidst turmoil in the economic system. It is a hedge against potential weakness in the equities market although it does not yield any return such as dividends.

In the current environment where interest rates are set to decline and globalisation to go into a reverse mode, gold is a safe haven. This explains the rise of the price of the precious commodity and the growing number of gold exchange-traded-funds.

Gold is hovering around US$1,440 per ounce, which is a six-year high. It has some more legs to go depending on the global economic environment. However it is still some way to go before hitting the all-time high of US$1,900 which was breached in September 2011.

Apart from central banks, gold is also dependent on some big markets such as Dubai and India where there is a recovery in demand since the second quarter of this year. In these places, the jewellery market is huge driven primarily by retailers.

As long as the Federal Reserve is under pressure to reduce interest rates, the price of gold should rise. The trade war that has prompted many countries to diversify their risk away from the US dollar is another plus point for gold.

However the situation will turn quickly should the global economic environment improve. All it takes is only a few words from President Donald Trump.

Outlandish valuations

IN this weakened equity market, stock values are fast inching down. Companies seeking a flotation face pressure from investors to lower their valuations. Even when the issuers do lower their initial public offering (IPO) valuations, things can go awry as the market isn’t able to support even a reasonably priced listing, as the Malaysian market has shown this year.

Now juxtapose this with this mind-boggling fact: in China, a biotech company has priced its IPO at about 468 times its historical earnings. Bloomberg reported that the company, Shenzhen Chipscreen Biosciences Co, plans to raise about one billion yuan (RM600mil) from the offering, about 27% more than its initial target.

It seems that China’s regulators have removed an unwritten cap on valuations for companies debuting on Shanghai’s new Star market, in a bid to attract high-growth technology firms to list. The news report also noted that another company that began trading last week, namely Advanced Micro-Fabrication Equipment Inc, has almost tripled in value since listing at 171 times profit.

No doubt, high-growth companies tend to trade at high values, with investors hoping that these big names grow exponentially. However, the pricing of these companies does seem highly overvalued.

Do note that the listings of two unicorns in the United States, Uber and Lyft, have resulted in their share prices eroding after going public. Investors will not continue to fund high valuations forever. If a company fails to deliver the expected spectacular results over time, investors will sell the stock.

However, Amazon is an example of a loss-making company that became successful over time. However, not every company is Amazon.

Investors in the loftily valued Chinese tech stocks ought to realise that or risk losing their shirts.

Keeping Malaysia in the third world

WE all know there are a lot of foreign workers in Malaysia. But just how many?

It is 46% of the working population and that is enough for the government to now look at reforming labour laws to reduce the country’s dependence on migrant workers.

With Malaysia having more than seven million foreign workers out of a working population of 15.5 million people, the prime minister was reported as saying that generating more skilled jobs, raising salaries and wages, enhancing “management of migrant workers” and improving labour market conditions were some of his government’s top labour-reform priorities.

“These reforms are crucial, not only in developing human capital to support our future economic growth, but also in addressing job mismatches which contribute to graduate underemployment, unemployment and slow wage growth as well as over-dependence on foreign labour,” he said.

Acerbating the situation is the rising levels of graduate unemployment where youth unemployment between the age of 20 to 24 years was 9.6% based on statistics in 2017. The national average was in the 3% range.

Given that so many industries have been asking for continued inflows of unskilled foreign labour, it would appear that having a degree or diploma is worse off than being an unskilled worker in Malaysia when it comes to job opportunities.

The other issue with having such a large number of foreign workers is the pressure it puts on wages rising upwards. Malaysia’s wage share to GDP is at 35% and it is not a position a country that is seeking to be a high-income nation wants to be in. That percentage is way below China, which has crossed 50% and is approaching the level seen by the US.

Keeping wages low has had a terrible impact on the economy. Many Malaysians cannot afford to buy a home and noises are growing of complaints that it is becoming increasingly difficult to afford basic necessities.

The cheap labour, some will say, has also prevented Malaysia from rising through the value-added chain and has negated productivity gains that would have come through automation.

It is time that the government re-looks at our labour laws where the answer is no longer bringing in cheap labour.

Boustead clarifies

IN reference to last week’s “Short Position” on Boustead Holdings Bhd, the group has clarified that the proceeds of the Islamic medium-term notes programme will be utilised to refinance existing borrowings and financing, which are currently prone to high interest costs.

“This will allow the group to improve capital management and financial flexibility, without impacting our gearing level or increasing borrowings. At this juncture, the fact that Boustead was able to acquire this medium-term funding is a reflection of the market’s confidence in the group’s viability and prospects,” a spokesperson says.

The spokesperson adds, “We will continue to make sound decisions that will enable Boustead to move forward and support its long-term sustainability.”
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