It’s unnatural for loan writing to run ahead of deposit taking for so long.

Something weird is going on at Malaysia’s banks. And no, it has nothing to do with the 1MDB money-laundering scandal.

The problem is about deposits, or more precisely, a lack of them. As CIMB Group Holdings Bhd. analyst Winson Ng notes, the banking industry’s loans-to-deposit ratio has gone from 76 percent in February 2012 to 90 percent in June. For Malayan Banking Bhd., or Maybank, the ratio is approaching 101 percent, a level last briefly seen in 2006, according to data compiled by Bloomberg.

Maybank may be the canary in the coalmine.

The largest Malaysian lender controls 26 percent of the $411 billion the country’s publicly traded financial institutions have in deposits. For almost three decades, Maybank’s loans and deposits have both grown at a compounded annual rate of 13 percent. In the past five years, however, deposit growth has slowed to 9 percent, while loans are still expanding at 11 percent. That gap of 2 percentage points is pushing up funding costs.

Large Malaysian banks — Maybank, Public Bank Bhd., CIMB and Hong Leong Bank Bhd. — are now earning a net interest spread of less than 2 percent, which puts them in the ranks of emerging Asia’s least profitable lenders.

With deposits getting squeezed, listed Malaysian banks and their subsidiaries have raised $6.4 billion from fixed-income markets this year, the most since 2014. Less than half of it is in ringgit, though.

The growing reliance on foreign-currency debt is disadvantageous. Borrowing three-month money in the local interbank market, and using those funds to buy dollars for the same period, costs Malaysia’s lenders 1.9 percent, an 60-basis-point spread over Libor. In Asia, this premium for short-term dollar funding is stiffer only for Indonesian banks. Unlike their Malaysian peers, however, the Indonesians have plenty of margin headroom.

It’s unnatural for loan writing to run ahead of deposit taking for so long. A similar surge in Indian banks’ loans-to-deposit ratios between 2008 and 2014 coincided, initially, with abysmal interest spreads. To boost the latter, lenders threw money at any large company that showed up with a semi-cooked proposal. The cycle ended, predictably, with a blowout in nonperforming assets.

Big Malaysian firms aren’t as reliant on banks for funding, which has helped contain system-wide bad loans at 1.65 percent. However, if banks keep paying more for deposits, they’ll have to accept riskier borrowers. The longer it goes on, the more sinister the deposit crunch may become.

Courtesy of Bloomberg Gadfly

Chances are you have heard of the escalating conflict between North Korea and the United States due to North Korean leader Kim Jong Un flexing his ICBM arsenal.

As of late, exchanges have been made between the nations with President Trump capturing the media’s attention yet again with the infamous threat when promising “fire and fury” to Kim Jong Un’s military nation. To no one’s surprise, the DPRK pushed back with threats directed towards the U.S military state of Guam which in turn demanded another U.S response.

China has now officially condemned the North Korean Nuclear program meaning the DPRK stand alone on their overly ambitious, offensive stance.

The media has captured the attention of the world and progress towards a diplomatic approach appear less and less likely. With this being said, the response of the market is beginning to voice its opinion on the matter with the defense industry gaining traction while the S&P 500 slipped 0.2 per cent after the “fire and fury” comments.

In the last 5 days, Northrop Grumman Corporation (NYSE:NOC) gained 2.35 per cent, Raytheon Company (NYSE:RTN) gained 4.23 per cent, and Lockheed Martin (NYSE:LMT) gained a commanding 5.06 per cent.

The companies listed above are subject to heavy government exposure which is likely the cause for the increased demand. Boeing on the other hand, failed to live up to expectations with their stock dropping 2.84 per cent in the most recent five days.

Defense stocks have already been booming since President Trump’s election. Answering to Trump’s promises of increased military spending, stocks in the aerospace and defense industry have shot up 39% based on the SPDR S&P 500 Aerospace and Defense exchange-traded fund.

Currently speaking, most analysts are recommending the “buy” option for these military stocks but keep in mind that investing during volatile and even potential war times may require you to sit on the edge of your seat incase markets adjust, plus, they are not the most ethical of investments in my opinion.

Some skeptics are doubtful that a military conflict will actually kick off however, based on the political landscape of the scenario, nothing really seems sure at the moment.

All the best and if you would like any further information please let me know

Stuart

CEO

Farringdon Group

+60 3 2026 0286

Struggling to understand the implications of the introduction of the Foreign Account Tax Compliance Act (FATCA)?

The unintended impact of FATCA means US expats have an ever decreasing number of places to turn to for financial advice and a dwindling number of investment products to choice from.

The introduction of the Foreign Account Tax Compliance Act (FATCA) from 1st July 2014 is causing widespread panic among US expats.

Under FATCA, non-US banks and financial institutions with American clients must separately report those account details directly to the IRS. This is leading to many offshore banks, providers and other institutions refusing to deal with wealthy US expats, because they do not have to deal with the cost, complexity and risk of dealing with the IRS.

This means that US expats now have fewer and fewer choices when it comes to financial advice and wealth management. And this reduction in the choice of investment vehicles and savings options is becoming problematic. The number of cases where Americans have given up their citizenship because they’ve felt overwhelmed by this new tax law and incensed by having to consider financial options that are not only tax inefficient have risen sharply over the last 3 years and we foresee this figure only getting bigger – http://www.bbc.com/news/35383435

The US is virtually unique in requiring all US citizens wherever they are in the world to report their income to the IRS at an individual level. And with top rates of income tax up from 35% in 2012 to 39.6% today, ditto capital gains tax and the tax on ordinary dividends also now 39.6% (up from 15% in 2012), the challenge, particularly for high net worth US expats, is to achieve a tax advantage on savings that is otherwise subject to the above rates, while at the same time remaining FATCA compliant.

While it is possible for US taxpayers to obtain income and capital gains tax deferral using traditional qualified variable annuity contracts, the costs of these contracts can be quite significant.

The solution is built around the US/Maltese double tax treaty, which means income and gains within the plan are not subject to US Federal taxes. What’s more, as a qualifying plan for US tax purposes, members can claim relief on realised income and gains generated within the plan, saving between 20% and 39.6%.

The problem

As an American expat you are still liable to pay tax on your worldwide income, albeit with some additional benefits to mainland residents. With the introduction of FATCA, international financial institutions now have to report any US tax-paying clients to the IRS, resulting in burdensome reporting and often unprofitable business. The result being that US expats are now being shunned by many financial institutions leaving it difficult to find advice or support.

The Solution

Despite the new rules though, there are still many ways you can legally minimise your tax liability, often through the use of Double Taxation Agreements (DTA’s), recognised by the IRS as compliant savings schemes. The use of such schemes in safe jurisdictions can result in greater flexibility over your savings, including access and investment choice along with the massive benefits of Gross Roll-Up or Deferred Taxation.

Key Points:

• Ensure your savings plan has as much diversity as possible to capture market gains, balance volatility and reduce risk.
• Verify that your savings vehicle complies with reporting obligations and does not penalise you for withdrawals or compromise your tax position.
• Check any savings plans are held in politically stable jurisdictions on good terms with the US.

FAQ’s

What should I be doing?

All US taxpayers must report all earned and unearned income and worldwide assets every year. On top of this you must also disclose the details of every bank account that you have power of signatory over, if the total value of your overseas bank accounts is in excess of $10,000.

How do I remain tax efficient?

From 2013, the top rate of income tax increased from 35% to 39.6% along with short term capital gains tax and the tax on dividends, whilst long term capital gains tax remained at 20%. Therefore the most basic planning advice would be to structure your investment portfolio to give rise to long term capital gains – rather than short term.

How can I use my pension?

Whilst overseas, US taxpayers can continue to contribute to Individual Retirement Accounts (“IRAs”) back in the US. You have a choice whether to fund a Traditional or Roth IRA and either claim tax relief on the way into the pension – or on the way out as you draw income.

Long term savings options

Building up a substantial savings pot is a key priority and best achieved using a wide range of investment opportunities.

Such a strategy introduces diversity into a savings plan and reduces risk. However, for US expats the need to comply with IRS tax reporting as well as the introduction of FATCA means the underlying plan structure is an additional consideration. For long term savings or retirement plans you need to check on any restrictions on withdrawals in terms of age and percentage of the plan’s value which you are able to take out.

Withdrawals can be taken as an initial lump sum of up to 30% of the total value of the plan or as part of ongoing programmed withdrawals. This approach not only provides gross roll up to defer US tax on realised income and gains on investments, but an absolute saving can be achieved through paying untaxed income and gains in the form of a lump sum and/or programmed withdrawals, which will not be subject to either US Federal taxes or Maltese withholding taxes.

How will FATCA affect my Retirement?

There is still a level of uncertainty on how FATCA could impact certain company or state sponsored retirement funds of US employees working abroad. News reports pointing out restrictions on underlying investments may result in changes to member plans in order to comply.

By structuring plans as a Foreign Grantor Trust, the IRS accepts that the value of the plan forms part of the member’s estate for US Estate Tax on death. This means there is no limit on the level of savings which can be contributed to the plan as contributions are not removed from the member’s US estate.

While contributions made to such a Plan will not receive US tax relief, they can be made in a wide variety of forms such as cash, existing investment portfolios, life assurance policies or shares in mutual funds.

All the best and if you would like any further information please let me know as this subject can get extremely complicated.

Stuart

CEO

Farringdon Group

+60 3 2026 0286

US non-farm payrolls rise

Grand jury impaneled in Russia/election probe

Dow sets record on impressive corporate earnings

Trump signs bill sanctioning Russia, Iran and North Korea

US considers trade action against China

Greenspan sees bond bubble

Global equities edged higher this week amid continued strength in US markets as another impressive earnings season unfolds. The Dow surpassed the 22,000 mark during the week, aided by a tailwind from a weakening US dollar and supportive US economic data. The euro rose to an 18-month high, acting as a headwind for shares of European multinationals but supporting commodity prices. West Texas Intermediate crude oil prices broke above the $50-per-barrel barrier at midweek, but eased to end near $49, down slightly from last week’s $49.65. The yield on the US 10-year Treasury note slipped three basis points on the week to 2.27%. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), declined to 9.9 from 11.0 a week ago.

MACRO NEWS

Another solid US employment report

US labour markets remained tight in July, with the unemployment rate slipping to 4.3%, matching a recent 16-year low. The economy added another 209,000 jobs, handily exceeding the 180,000 six-month average. However, despite solid job growth, wages remain restrained, with average hourly earnings holding steady at a 2.5% annual growth rate. The upbeat data should keep the US Federal Reserve on course to begin shrinking its balance sheet in the next few months and for another rate hike before year’s end.

Russia probe ratchets up

Special counsel Robert Mueller has empanelled a grand jury in Washington, D.C., to investigate Russian interference in the 2016 US presidential election, according to the Wall Street Journal. This indicates the probe is entering a new phase and suggests it could last for months.

Dow reaches new milestone

One thousand points isn’t what it used to be, accounting for a move of less than 5% at present levels, but markets took note of this week’s milestone nonetheless as the venerable Dow Jones Industrial Average broke and closed above the 22,000 mark for the first time. Solid corporate earnings and a weakening US dollar are providing a favourable backdrop for equities amid slow-but-steady economic growth and low inflation. The growth/inflation combination could keep the Fed from tightening monetary policy more quickly than expected.

Trump reluctantly signs sanctions bill

US president Donald Trump, fearing that a veto would be overridden by Congress, this week signed a sanctions bill that targets Russia’s energy and defence sectors. Trump’s objections to the bill stem from his belief that it encroaches on the executive branch’s authority to negotiate. Reacting to the bill, Russian Prime Minister Dmitry Medvedev declared that a full-fledged trade war has been declared against Russia.

Russia also ejected 755 US diplomats and seized two diplomatic properties. The bill also includes sanctions on North Korea and Iran.

US scrutinizes China’s IP practices

The Trump administration is considering taking trade action against China and is discussing launching a probe into Beijing’s insistence that foreign companies transfer technology to local Chinese subsidiaries and partners. The administration could launch a “Section 301” action, which allows the president to impose duties on products from countries that use unfair trade practices. An announcement had been scheduled for Friday, but was cancelled by the White House without explanation. Trump also this week linked trade with lack of progress on restricting North Korea’s nuclear program, suggesting the potential for trade restrictions with China unless it takes action to restrain its neighbour.

Greenspan more worried about bonds than stocks

Former Fed chairman Alan Greenspan opined this week that we are experiencing a bubble, not in stock prices, but in bond prices. Real long-term interest rates are much too low and are therefore unsustainable, he said. Greenspan sees a return to 1970s’-style “stagflation,” or poor economic growth and rising inflation. “That is not good for asset prices,” he warned.

Czech central bank first in Europe to hike rates

While the Bank of England and the European Central Bank have been contemplating shifting to less accommodative monetary policy stances, the Czech central bank took action on Thursday, raising its main policy rate from 0.05% to 0.25%, its first hike since 2008. Rising wages and shrinking economic slack were factors behind the rate boost. Meanwhile, the BOE voted 6–2 on Thursday to hold rates steady. Markets have been on high alert since a close 5–3 vote at the June BOE meeting to leave rates unchanged raised the spectre of an interest rate hike sooner than the market had anticipated.

Venezuelan crisis intensifies after vote, arrests

Following a disputed election for a new legislative body last weekend, in which voting tallies were reportedly manipulated, and the arrest of two high-profile opposition leaders, Venezuelan president Nicolas Maduro faces increased pressure both from within Venezuela and without. The United States placed sanctions against Maduro, freezing any assets he holds in the US, and barred Americans from doing business with him. Also, anyone doing business with the newly elected legislative superbody will also be subject to US sanctions.

EARNINGS NEWS

According to Thomson Reuters I/B/E/S, with 75% of the companies in the S&P 500 Index having reported, Q2 earnings are expected to increase 11.8% compared with a year ago. Excluding the energy sector, the earnings growth estimate dips to 9.2%. Revenues are expected to increase by 5% compared with Q2 2016, and 4.1% excluding energy.

All the Best and have a great week ahead

Stuart

CEO

Farringdon Group

+60 3 2026 0286

• US growth sees modest Q2 bounce-back
• Greece returns to the Bond Markets
• Fed: Balance sheet run off to commence “relatively soon”
• IMF lowers US growth outlook, raises others’
• Abe’s support slides as scandals mount
• Trump backs corporate, middle-class tax cuts

A busy week of corporate earnings injected volatility into the major European indexes. Soft manufacturing data, notably in Germany and France, at the start of the week weighed on the market. But by midweek, as earnings season was in full swing, telecommunication, technology, and utility stocks led the markets higher. However, by the end of the week, European technology stocks, hurt by earnings misses and profit taking, were a drag on Germany’s Dax and France’s CAC 40. The pan-European index Stoxx 600 finished the week lower along with the US S&P 500.

MACRO NEWS

US GDP rebounds from sluggish start to year

US economic growth accelerated in the second quarter, rising 2.6%, up from the first quarter’s 1.2% pace. Economists had expected a slightly stronger rebound, and the bounce is well short of expectations from earlier in the quarter. Wage pressures remain muted as hopes for sustained faster growth fade, given that pro-growth policies from Washington are looking less likely by the day. Modest growth averaging around 2% looks to be in the cards again in 2017. This should keep the US Federal Reserve on a gradual rate hiking path.

Greece returns to the Bond Markets

The financially strapped country returned to the financial markets for the first time since 2014 and sold about €3 billion of five-year bonds at an interest rate of 4.625%, a relatively high yield, to account for the inherent riskiness in holding Greek bonds. Greece is the rare sovereign that issues sovereign debt at a higher yield than some Greek corporates. The extra yield reflects the political risk posed by Greece’s relatively market-unfriendly Syriza government. Yields across most eurozone government bond markets broadly tracked U.S. Treasuries as they fell in the second half of the week following the Federal Reserve’s policy meeting on Wednesday.

Fed signals it’s ready to cut balance sheet soon

In a statement released after Wednesday’s Federal Open Market Committee meeting, the Fed indicated it is ready to begin trimming its balance sheet, which enlarged in the wake of the global financial crisis. In a statement, the Fed said it expects to begin allowing some of its bond holdings to mature “relatively soon.” This is a shift from earlier language, released after the June FOMC meeting, that indicated a move by the end of the year. Many expect an announcement to come at the September FOMC meeting. The Fed held rates steady while acknowledging that inflation is running below its 2% target.

IMF affirms global growth view

In a mid-year review, the International Monetary Fund maintained its forecast for 3.5% growth in gross domestic product this year. The fund lowered its outlook for US growth to 2.1% from a previous reading of 2.3% while raising its outlook for the eurozone and Japan. It downgraded its outlook for UK growth.

US health care push fizzles

Despite their effort being pronounced dead on several occasions, US Senate Republicans took up health care reform again this week after a dramatic return to the Capitol by Senator John McCain, who was recently diagnosed with brain cancer. Vice President Mike Pence broke a 50–50 tie to allow the Senate to begin debate on several Republican-sponsored legislative options. Ironically, McCain helped scuttle the final alternative, a “skinny repeal” bill that would have ended Obamacare’s individual mandate, among other provisions. Now that the health care bill has been defeated, Senate leaders hope to move on to tax reform and to passing a spending bill in order to avoid a government shutdown at the end of September.

Japan’s defense minister forced to step down

While much of the world has been focused on goings on in Washington, Japan has had to deal with a series of scandals that have undermined Prime Minister Shinzo Abe. Abe has been accused of cronyism, having helped a friend secure a license to open a veterinary school. Meanwhile, defense minister Tomomi Inada was forced to resign this week over an alleged cover-up of military documents from UN peacekeeping operations in South Sudan. Inada’s ministry is accused of concealing logs which show that Japanese troops were in increasing danger during their mission. The departure comes as support for Abe hovers near 20% in opinion polls. Despite Abe’s slide in popularity, the opposition Democratic Party has been unable to gain support, prompting the resignation this week of party leader Renho Murata after 10 months at the helm.

Trump talks taxes

Amid a swirl of controversy, US president Donald Trump, in an interview with the Wall Street Journal this week, reiterated his desire to slash the US corporate tax rate to 15% from 35% while lowering the tax burden on the middle class. Additionally, Trump kept open the option of raising taxes on upper-income earners. The president did not rule out reappointing Fed chair Janet Yellen, but said that economic advisor Gary Cohn, former president of Goldman Sachs, is also under consideration for the post. In a press release on tax reform on Thursday, congressional leaders and administration officials agreed to table the border-adjustment tax that would have taxed US imports.

Moody’s sees less China bank risk

Credit rating agency Moody’s has upgraded its outlook on the Chinese banking system to stable from negative. Moody’s sees receding concerns over China’s massive shadow banking sector following action from regulators to curb systemic imbalances. It also expects nonperforming loans to stabilize near current levels.

EARNINGS NEWS

According to Thomson Reuters I/E/B/S, with 48% of the members of the S&P 500 Index reporting, second-quarter earnings are expected to rise 10.7% versus Q2 2016. Excluding the energy sector, the rise is 8%. Revenues are expected to climb 4.9%. Excluding energy, a 4.1% earnings rise is expected

Week Ahead

All the Best and have a great week ahead

Stuart

CEO

Farringdon Group

+60 3 2026 0286

S&P 500 and MSCI World among record-setters

Foreign investment in US real estate hits new high

Trump’s pro-growth agenda further snagged

BOJ pushes inflation deadline back again

ECB to discuss QE this autumn

Global equities set records this week as a Goldilocks environment of moderate growth and accommodating central banks prevailed. European shares have been relative laggards, perhaps constrained by the recent rise in the euro, which hurts export competitiveness. The yield on the US 10- year Treasury note fell on the week to 2.24% from last week’s 2.32%. The price of a barrel of West Texas Intermediate crude oil remained unchanged at $46.35. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), was steady at a historically low 9.9.

GLOBAL MACRO NEWS

Equities extend record rally
Though the US business cycle is set to enter its ninth year in the weeks ahead, equity prices continue to advance, underpinned by a solid start to earnings season and steady interest rates. Among the indices setting records this week were the US bellwether S&P 500, the MSCI World, the Russell 2000 and the Nasdaq Composite.

Foreign purchases of US homes hits record
For the year ended March 2017, foreign investment in US residential real estate hit a high, according to the National Association of Realtors. Foreign buyers accounted for fully 10% of the dollar value of US homes purchased over the year, up from 7% the year before, amounting to $153 billion in purchases. Buyers from China and Canada led the list, followed by those from the United Kingdom, Mexico and India. Sales were concentrated largely in Florida, California and Texas.

McCain illness adds to Trump’s legislative woes
Efforts by Senate Republicans to repeal and replace Obamacare went down to defeat this week, and work to repeal the 2010 health care law and replace it at a later date has been complicated by news that Arizona senator John McCain was recently diagnosed with an aggressive form of brain cancer, making his return to Washington, D.C., any time soon uncertain. Republicans hold a narrow 52–48 advantage in the Senate, so McCain’s absence narrows the margin further, making it less likely that pro-growth reforms will advance this legislative session. After health care, the Senate is expected to take up tax reform, though there is not yet a consensus among Republicans on how to approach the issue.

Elusive BOJ inflation target slips further into future
The Bank of Japan postponed by another year the date it expects to achieve its 2% inflation target, now forecasting that the goal will be achieved in March 2020. This is the sixth time the BOJ has pushed the target out into the future. The central bank projects that consumer prices, excluding food and energy, will rise only 1.1% in the year ending March 2018.

ECB delays taper discussion
European Central Bank President Mario Draghi said the bank did not discuss tapering asset purchases at its meeting on Thursday but would address the issue this fall. Draghi’s tone was less hawkish than in late June, when he suggested the ECB could begin to wind down its asset purchase program soon. Since that speech, inflation data globally have softened, reducing the urgency of beginning to normalize monetary policy. Draghi is scheduled to speak in late August at the annual Jackson Hole central banking conference, where he might lay out his tapering plans.

UK eyeing transition deal?
The British government is rumored to be considering accepting the free movement of European Union citizens into the United Kingdom for a four-year period following its departure from the EU. Such a concession is thought to be part of a transition deal that will ease the impact of Brexit on UK-based businesses. Negotiators from the EU and UK met in a four-day session this week. Progress thus far has been slow, with the UK still formulating its Brexit strategy despite having triggered Article 50, which began the Brexit process, nearly three months ago. EU negotiator Michel Barnier has asked the UK to clarify its negotiating position.

EARNINGS NEWS

Earnings season off to a solid start
With 21% of S&P 500 companies having reported, the Q2 earnings season seems to have gotten off to a solid start. Seventy-six companies reported an 8.6% rise in earnings on 5.4% revenue growth. Earnings growth cooled from Q1’s torrid pace, however, as those 76 companies reported a 16.5% earnings gain during the period, according to Zacks Investment Research.

THE WEEK AHEAD

All the Best and have a great week ahead

Stuart

CEO

Farringdon Group

+60 3 2026 0286