The Fiscal Cliff can and will offer buying opportunities!

“The 1987 crash” “The Y2K bug” “The debt ceiling debacle of 2011” These events saw markets coming crashing down due to investor sentiments, but then turned out to be one of the best buying opportunities for stocks. As such we believe, the so called fiscal cliff may offer similar opportunities.

The first round of budget talks had been stated by the House Speaker as being constructive. Obama later on came out to express confidence that he and the Congress would reach an agreement that will avoid the automatic spending cuts and tax increases that are scheduled to occur at the end of the year. With these statements we saw a temporary rise in the equity markets towards the end of the trading period for the week, though last week’s trading sent the Dow Jones to its longest losing streak since August 2011. Investor sentiments remain weak, however it suggest hope for a rally once outcome of the budget talks are released.


Stuart Yeomans Obama

The S&P has fallen by more than 5% since Obama’s re-election; however this pessimism is a result of investor’s sentiment rather than technicality. It doesn’t really sound right to wake up the day after an election and realize that the economy will suffer from a “fiscal cliff”. The phrase “fiscal cliff” is now part of the American lexicon, describing the looming deadline when tax cuts expire and spending cuts kick in at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.

Among the laws set to change at midnight on December 31, 2012, are the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law. At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron’s, over 1,000 government programs – including the defence budget and Medicare are in line for “deep, automatic cuts.”

In dealing with the fiscal cliff, U.S. lawmakers have a choice among three options; they can let the current policy scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit, as a percentage of GDP, would be cut in half.

They can cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States’ debt will continue to grow.

They could take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.

None of this looks attractive!

The debate over how to solve the fiscal cliff may be more productive than is commonly recognized, as markets have considered all of the above. Hikes on capital gains and dividend taxes are on the line, and Obama has dug in his heels on what he sees as a mandate to make the tax code more progressive. He seems to have the upper hand in dealings with Congress because Republican lawmakers don’t want to see tax rates increase, which is what will happen if no solution is found by the beginning of 2013.

Republicans don’t want to take the blame for driving the economy over the cliff. The current crisis is similar to last year’s fight to raise the US debt ceiling, which led to the downgrade of the United States’ top credit rating in early August 2011. During the dealings, the S&P 500 lost 18.8% between its peak in July 2011 and its bottom in August. As the market slid, the political standoff badly hurt investors’ confidence in Washington, setting off a spike in volatility.

In the end a deal was announced that raised the ceiling and put off longer-term fiscal decisions until Jan 1, 2013, setting the stage for today’s “fiscal cliff” crisis.

After staying flat through September 2011, the S&P 500 jumped 31% between its October low and the end of March. The recent selling took the S&P 500’s relative strength index – a technical measure of internal strength – below 30 this week, indicating the benchmark is oversold and due for a rebound.

Volatility is expected to rise through the end of November and to spike in late December if no agreement on the fiscal cliff is reached in Congress. Alongside comes opportunity for those with high risk tolerance. However with both Obama and the Congress being happy with the first round of discussion we believe, markets are in for a yearend rally!

I hope that you enjoyed reading

Warm regards


Stuart Yeomans 


Farringdon Group

Kuala Lumpur : Malaysia


November Global Update

Real Gross Domestic Product – the output of goods and services produced by labour and property located in the United Sates – increased at an annual rate of 2% in the third quarter of 2012, which is better than forecasted. In the second quarter, real GDP increased by 1.3%. The growth probably picked up in the third quarter following stronger consumer spending, an improving housing sector and increased defense spending. Though the figures that were released are better than expected, this would be the first time back to back figures have never exceeded 2% since the US emerged from the recession in 2009. The improving housing market has helped in boosting household confidence whilst companies have cut back on replacing outdated equipment on concerns of the so called “fiscal cliff”. Most analysts believe that the economy is going through a slow and stable recovery and consumers are regaining confidence; however business spending continues to be a concern. Consumer spending grew to a 2% annual rate over the last quarter compared to an annual growth of 1.5% in the second quarter of 2012. Retail sales in September and August had the best back to back showing since late 2010 as shoppers purchased goods from cars to iPhones; a sign that demand was heading towards the year-end holiday season high. Cars and light trucks sold at an annual rate of 14.9 million in September, the highest since March 2008.

Decreasing unemployment and strengthening home prices should mean that consumer confidence will continue to increase. Nonfarm payrolls rose in September by 114,000 compared to an increase of 142,000 the previous month, and analysts estimate the nonfarm payroll for October to be at 125,000. The steep increase in payrolls in August was believed to be from seasonal employment. The unemployment rate fell to a 3 year low of 7.8% in September from 8.1% and is expected to be at 7.9% in October. Employment and the economy has been the central theme in the campaigns of President Barack Obama and Republican challenger Mitt Romney ahead of the November 6th presidential election. No US president since World War II has faced re-election with unemployment over 8% and an unemployment rate of 7.8% has been the lowest since President Obama took office in 2009. The US stock market have been closed for the last two trading days in October due to hurricane Sandy and is expected to resume trading on the 1st of October; this has been the longest weather-related shutdown in more than a century. The presidential campaigns have been disrupted and both candidates and their running mates have tempered their campaigns, eager not to appear out of sync with more immediate worries over flooding, power outages, economic calamity and personal safety.

In the UK, GDP rose by 0.6% compared to the previous three months. The surge masks underlying weakness in the economy that may still prompt more stimulus from the Bank of England. As policy makers are still divided on the need for more bond purchases when the current round ends in November, a few have said there is “considerable scope” to add to the so called quantitative easing. Even with additional positive signs of late, the economy remains weak, while large downside risks particularly around the euro-area situation continue to harm. Most of the Bank of England members may still support at least some loosening of the monetary policy. However, some officials have different views on the need of more quantitative easing, with some of the nine Monetary Policy Committee members questioning its potential impact. Reports released on the 9th October by the National Institute of Economics and Social Research showed that the economy grew by 0.8% and between 0.2% and 0.3% after deducting distortions. On the other hand, estimates in the Bloomberg GDP survey ranged from no change to an increase of 0.8%. Recently released data gave a boost to the outlook, with inflation easing, unemployment falling and retail sales rising more than forecast. Consumer price growth eased to 2.2% in September, the slowest in almost 3 years, while retail sales increased by 0.6%. The labor-market report showed that payrolls rose to a record in the quarter through August, pushing the unemployment rate down to 7.9% from 8.1%.

In Europe, reports showed that Spain’s recession extended into the third quarter while inflation has stayed high in October. This signals that its government’s austerity programme to cut public deficit is also increasing living expenses. GDP in Spain shrank 0.3% quarter on quarter between July and September marking the fifth consecutive quarter of contraction. The reading was however slightly better, as economists forecasted a fall of 0.4%. On an annual basis, the economy has shrunk by 1.6% and is still in line to meet its end of the year GDP target. Spain’s conservatives, who have been in power since December, have laid out spending cuts and tax hikes worth over 60 billion Euros to the end of 2014 to cut the budget gap within EU guidelines. This measurement includes an across the board increase of the VAT rate, in force since 1st September, which has pushed up consumer prices and hit sentiment on the high street. Retail sales have fallen at the sharpest pace on record since September as shoppers who are already cash-strapped shielded away from purchases after the price hike. The Eurozone’s fourth largest economy is at the centre of the bloc’s debt crisis on concerns that the government cannot control its finances. Spain’s refinancing costs on international debt markets soared to a euro-era high in July but have since eased after the European Central Bank said it would activate a sovereign bond buying programme for countries that ask for European aid. Spain has however refrained from asking for aid in fear of austerity measures it would have to further suffer.

In Asia, export-oriented countries such as Korea, Taiwan and Japan, have been quite significantly affected by the recession in Europe, lacklustre growth in the US and a slowing China. While the export sector in ASEAN has been losing momentum in recent months (particularly commodity exports from Malaysia and Indonesia), their economic growth, surprisingly, has remained strong. Indonesia, the Philippines, Malaysia and Thailand grew at 6.4%, 5.9%, 5.4% and 4.2% year-on-year, respectively, in real terms in 2Q 2012. The weighted average real GDP growth for the ASEAN-51 was 5.0% in 2Q, still above the 18-year average of 4.7%. During this period, the growth of other Emerging Markets weakened to below the long-term mean. Therefore, the relative economic performance of ASEAN is really quite impressive. In China, government policy has been incrementally supportive for economic growth since the second quarter of this year, with moderate monetary and fiscal policy announcements. Exports, a key drag to economic growth, have slowed to a 3-year low to 1% in July. In mid-September, a string of policies were announced by Beijing to stabilize growth, including speeding up the export tax rebate, expanding financial support for exporters and simplifying custom procedures. Overall economic growth is expected to see signs of improvement entering into the fourth quarter as there came broader improving data points across housing starts, auto production and infrastructure construction. Chinese residential property continues to enjoy a recovery with new home sales growth maintaining a 13.3% year-on-year, after a 14.5% rise in July. That ended a run of nine consecutive months of negative year-on-year sales numbers. Stronger sales last month led to stronger residential investments, which are anticipated to continue going forward. Investment in residential property returned to 10.6% year-to-date. We have continued to maintain a risk adverse approach by minimizing exposure to aggressive equity markets and volatile commodities. Should there be a rally our portfolios are positioned to benefit through our US Equity funds and Mixed Asset funds which are moderately exposed to global equities.

I hope that you have enjoyed reading this post.

Stuart Yeomans 


Farringdon Group

Kuala Lumpur : Malaysia

Hong Kong Monetary Authority Intervene in Currency Markets

Hong Kong’s Monetary Authority (HKMA) has intervened in the currency markets for the third time in less than a week, selling a total of HK$6.63bn (US$855m) to halt the rise of the Hong Kong dollar against the US dollar.

Hong Kong currency pushes up against the upper limits of its trading band of US$1 to HK$7.75

The mechanisms that govern Hong Kong’s currency board, by which the Hong Kong dollar’s exchange rate is linked to the US dollar, mean that the central bank must buy US dollars when the Hong Kong currency pushes up against the upper limits of its trading band of US$1 to HK$7.75.

In an attempt to halt appreciation of the local currency after it hit HK$7.75, the lower limit of its trading band to the U.S. dollar. The HKMA started selling Hong Kong dollars in the foreign exchange markets on October 19 2012. This was the first of such a move, the central bank had made since December 2009.

The link of the Hong Kong dollar to the US dollar was put in place in 1983 when negotiations about the future of the British colony after 1997 had sparked nervousness in the local business community.

In 2005 Hong Kong committed to keep the exchange rate between HK$7.75 and HK$7.85. The link has given Hong Kong companies stability in commercial contracts while tethering monetary policy to that of the U.S., where borrowing costs are being held down to spur hiring and prop up the housing market. Hong Kong’s jobless rate is near a four-year low and home prices are at all-time highs, as Bloomberg reports.

Property prices in Hong Kong are among the highest in the world as local and mainland Chinese investors have rushed to buy apartments in the city as a hedge against inflation.

‘The city had $301.2 billion of foreign-exchange reserves as of the end of September, amounting to about eight times the currency in circulation. The holdings grew 8.5 percent in the past year’, Bloomberg reports.

According to Bloomberg, the analysts said that the strong inflow of money into Asian currencies and stock markets has been prompted by increasing investor appetite for emerging markets as they sought better returns. In a recent note to clients, HSBC said that the more “equity-oriented” currencies such as the Indian rupee, the Korean won and the Taiwanese dollar had outperformed as money had flowed into local stock markets.

The recent strength in the Hong Kong dollar against the US dollar was in line with other Asian currencies because the US. Federal Reserve’s quantitative easing measures had also weakened its own currency. Stella Lee, president of Success Futures & Foreign Exchange Ltd. in Hong Kong, said to Bloomberg by telephone that “there could be more intervention” in Hong Kong.

According to the Financial Times, over the past couple of years, the fact that the dollar peg allows the local central bank little latitude to curb asset price inflation in the city through raising interest rates, for example, has led to calls from HKMA’s previous Chief Executive Joseph Yam, to reconsider the currency mechanism. ANZ said that it remained confident that the system would stay in place for the foreseeable future. “The intervention suggests that the HKMA will continue to defend the HKD peg,” it said. “The currency reserve is sufficiently strong to defend against not only normal capital flow but also speculative pressure . . . The HKMA intervention and recent strength of the HKD will probably be temporary and successful.”

Government officials, however, have stressed that the linked exchange rate serves the city well by giving the financial centre the stability it needs. The lack of convertibility of the Chinese renminbi also makes it an unlikely currency for the Hong Kong dollar to be linked to despite the strong economic ties between China and Hong Kong.

 I hope that you have enjoyed reading this post.

Stuart Yeomans 


Farringdon Group

Kuala Lumpur : Malaysia

Malaysia’s confidence in withstanding capital in-flows

As Asian nations take the necessary steps to prevent asset bubbles after the U.S. boosted stimulus, Central Bank Governor Zeti Akhtar Aziz has reassured the Malaysian community by saying that;

 ‘Malaysia can manage capital inflows due to monetary easing in advanced economies.’

Governor Zeti, speaking with confidence

Zeti who oversaw the Malaysian response to capital outflows during the Asian financial crisis more than a decade ago, also said;

‘The country has the tools and flexibility to absorb any excess liquidity.’

Zeti spoke confidently and this is because of the good news that the Malaysian economy is withstanding the impact of weakening global growth, with the gross domestic product forecast to expand about 5 percent this year.

The Malaysian Ringgit is also very strong; I personally remember the currency being over seven Ringitt to just one pound sterling around 5 years back. We are now looking at a conversion rate of around RM4.9 to GBP1.

Due to the Malaysian financial system reaching new levels of maturity in terms of development and its functioning, the cash flows that Malaysia are in receipt of, can be intermediated.

This is in regards to both surges of inflows and reversals. All these effects are disbursed through the financial system rather than concentrated.

Malaysia are not the only country confident of this; Brazil has also signaled confidence that it can counter any surge in flow stemming from the U.S Federal Reserves QE3.

I hope that you have enjoyed reading this post.

Stuart Yeomans 


Farringdon Group

Kuala Lumpur : Malaysia

Does Indonesia need Policy Tightening?

Speedy economic growth, together with massive credit increases and deteriorating current accounts have spurred fears among many analysts that Indonesia’s economy may be overheating, which may see the central bank of Indonesia being forced to increase interest rates.

Indonesia has seen a sharp deterioration in its current account position over the past year. However, this is largely explained by a slump in foreign demand rather than an unsustainable consumer boom driving up imports. Large inflows of foreign direct investment mean the country should have few problems sustaining a deficit over the medium term. While credit is growing rapidly at the moment, strong credit growth in part reflects a period of catch-up after a prolonged period of deleveraging which followed the Asian financial crisis. In addition, unlike in Hong Kong and Vietnam, there is little evidence that strong lending growth is fuelling asset price bubbles. Most new lending is being directed to productive sectors of the economy.

The recent performance of the economy has certainly been impressive. In 2011, GDP grew at its fastest pace since the Asian financial crisis (1997-98), and the strong growth has continued into the first half of this year. However, strong growth on its own does not mean the economy is overheating. To determine whether the current impressive expansion is sustainable, let’s look at four main indicators: the current account; credit growth,; inflation; as well as our estimates of trend growth.

There has been a sharp and sudden deterioration in Indonesia’s current account position, which has been in deficit for the past three quarters. However, while a current account deficit can sometimes be a symptom of overheating, this does not have to be the case. The worsening of the current account is not the result of an unsustainable consumer boom driving up imports. Instead it is due mainly to a sharp fall in exports, which is the result of weaker global growth and falling prices for the goods that Indonesia sells abroad.

As a low-income, fast-growing economy with plenty of opportunities to invest, it arguably makes sense for Indonesia to be importing capital from the rest of the world (in other words, running a current account deficit). Moreover, while a current account deficit can be a source of instability, this is unlikely to be the case in Indonesia. Unlike the last time Indonesia ran a current account deficit in 1997, the country is much less dependent on volatile portfolio inflows to fund the deficit. As a result, Indonesia is much less vulnerable to a balance of payments crisis than it was 15 years ago.

Another possible sign of overheating is rapid credit growth, which is now expanding by 25% y/y – one of the fastest rates of growth in the region. Strong credit growth which is sustained over a number of years is certainly something the authorities need to keep an eye on. Indeed, rapid credit growth was one of the main causes of both the Asian financial crisis, as well as the problems that Vietnam is now experiencing. Recent rapid credit growth in Indonesia in part reflects a period of catch-up after a prolonged period of deleveraging which followed the Asian financial crisis. Credit as a share of GDP in Indonesia actually fell from over 60% in 1997 to less than 20% in 2000. In 2011, credit in Indonesia was still the equivalent to only 30% of GDP, one of the lowest levels in the region. In addition, as an economy develops and the financial sector becomes more sophisticated, it is normal and healthy for credit to grow faster than nominal GDP.

As important to how quickly credit has been growing is where the new lending has been directed. There is little evidence that strong credit growth in Indonesia is fuelling asset price bubbles. Whereas places such as Hong Kong and Vietnam have seen a surge of lending into property, only 8% of bank lending in Indonesia has been into property-related sectors. As a result, while property prices have massively outstripped wage growth in Hong Kong, prices in Indonesia are increasing at a much slower pace than incomes. In addition, the stock market is also showing little sign of excess. Since the start of the year the Jakarta Composite has moved roughly in line with trends in the rest of the region. Moreover, the current price-earnings ratio of the Indonesian stock market is broadly in line with its long-run average.

Consumer price inflation was just 4.6% y/y in August, and is comfortably within Bank Indonesia’s (BI) central 3.5-5.5% target range. Admittedly, inflation is likely to rise before the end of the year due mainly to rising food prices which are being pushed higher by unfavourable base effects. A good harvest and the suspension of some import duties on food helped to suppress food prices last year. However, the any spike in inflation is likely to be temporary, and is not a sign of economic overheating. Core inflation, which is a better guide to underlying inflationary pressures, has been stable and is likely to remain low.

Indonesia’s economy grew by 6.5% in 2011. Despite the downturn in global demand, growth in Indonesia has barely slowed, with GDP expanding by 6.4% year-on-year in the first half of 2012. This compares with average growth since 2001 of just over 5%. This on its own is not evidence of overheating. Increased political stability and a rising investment rate have all helped to boost trend growth in Indonesia, which is now estimated to be around 6.5%. In addition, capacity utilisation in Indonesia is not unusually high, and is broadly in line with the average level of the last few years.

There also seems little danger of a wage-price spiral developing in Indonesia. Limitations with the data make it difficult to form firm conclusions, but wages appear to be increasing slowly. Meanwhile, a relatively high unemployment rate suggests there is still plenty of slack in the labour market.

Considering all of the evidence, it is rather unlikely that Indonesia’s economy is overheating. As a result there is little urgency for Bank Indonesia to tighten monetary policy. Indeed, given the poor outlook for global demand and the likelihood that the crisis in the euro-zone will worsen again soon, we believe interest rates in Indonesia will remain at their current record low level for the rest of this year and next. That being said, a further significant deterioration in the current account or a step-up in credit growth may see policy tightening.

I hope that you enjoyed reading.

Stuart Yeomans 


Farringdon Group

Kuala Lumpur : Malaysia

Progress….. for Quality Expatriate Financial Advice in Malaysia

As some of you will be aware, I have been working hard with my colleagues at the LIIA to help increase the advice standards in Malaysia, through developing a progressive qualification pathway which will increase the advisory standards in Malaysia.

Helen Burggraf from International Adviser, interviewed me last month for an update on our pathway and to give readers an insight into what we plan. Below gives you a snippet into what we have accomplished so far. For the full story click here

Labuan in Move to be a Top International Insurance Centre

“Labuan, a group of tiny islands off the coast of Malaysia, this month is pulling the wraps off an ambitious plan to transform the regulation of its insurance industry.

It is counting on the introduction of a new regulatory environment to enable it to further develop its own insurance industry – and by association, that of Malaysia, of which Labuan is a part.

As part of this effort to raise the jurisdiction’s regulatory bar, a new qualification regime has been drawn up, with the intention of setting   rigorous and consistent standards for insurance brokers active in Labuan and Malaysia who look after international clients. As part of the scheme, these brokers will be listed, on a central database, to enable would-be clients to find them easily.

These measures are being paired with a marketing campaign that aims to ensure that all expats and other potential clients living in Malaysia know that they should do business only with qualified IFAs and brokers while there.

“By the end of next year, every adviser in Malaysia who looks after expat high-net-worth Malaysian clients will have a minimum of the Chartered Insurance Institute’s Certificate in Financial Planning (CFP),” said Stuart Yeomans, group chief executive and partner of Kuala Lumpur-based expat-specialist advisers Farringdon Group, and  member of the council of the Labuan International Insurance Association (LIIA), an insurance industry trade group. 

 “This will effectively pole-vault Malaysia, as a jurisdiction, to being at least the equivalent of the UK, qualification-wise.”

One side effect of this strategy is expected to be the quick end to what is said to be a relatively widespread practice – for now – of financial advisers and insurance brokers “tripping in” to Malaysia to look after foreign clients there, in spite of not holding the necessary Malaysian licences.

A crackdown on such in-tripping brokers has already begun, Yeomans said…….

The qualification pathway began on the 1st of September 2012

Features of the new standard

The new minimum standard for advisers in Labuan and Malaysia is described as being equal to the UK’s “CFP4” level, and is being accompanied, as it is in the UK, by a requirement for 35 hours a year of continual professional development.

Where it departs from the UK norm, though, is in the fact that it has been developed in a “matrix” format that provides a standard certification for individuals whose qualifications are based on different countries’ exams – for example, Australian, Malaysian, Singaporean or American, as well as British, according to Yeomans.

Another feature is a compulsory three-and-a-half-day “induction” course, the first of which will begin being held this month, which is aimed at all advisers currently practicing in Malaysia.

This is seen as an ongoing scheme that ultimately will aim to reach all new foreign IFAs and insurance brokers, to ensure they are up to speed on such topics as the Malaysian tax system, anti-money-laundering rules, and the full range of investment products available in the Malaysian market to foreign clients.

A half day of ethics training is included as part of the programme, as it has been drawn up, and all advisers – who will, as part of the new regime, be required to join the CII and MII – as a matter of course be expected to comply with the CII’s ethics code.

According to Yeomans, the induction course is a step beyond what most if not all other jurisdictions currently offer.”

Thanks to Helen Burggraf from the International Adviser for a great story.

I am going to publish a full detailed story about this new qualification pathway, which give you a detailed view into Labuan and Malaysia’s plans for the future!

I hope that you enjoyed reading.

Stuart Anthony Yeomans 


Farringdon Group

Kuala Lumpur : Malaysia