Analysis: Emerging market capital curbs may be just the ticket

in BEI Index, Business, IDX, Indonesia Shares, Indonesia Stock Market, Stock Exchange, bonds, economy

Reuters, By Sujata Rao, LONDON | Wed Jul 28, 2010 11:32am EDT

(Reuters) - Investors are buying more long-dated bonds and overseas-listed shares in key emerging markets, suggesting capital controls set up in these countries may be helping curb volatile portfolio flows and currency swings.

While it is hard to gauge the net impact of controls set up in some developing countries, the experience of Brazil and Indonesia suggests it is possible to deter big speculative flows or redirect portfolio cash to less volatile assets without necessarily scaring investors off.

Last October, frustrated by a 30 percent surge in the real, Brazil slapped a 2 percent tax on foreign flows into its stocks and bonds. It was followed by Taiwan, Indonesia and South Korea, which have imposed a variety of milder curbs on capital.

Nine months on, investors say they are still putting cash in Brazil while Finance Minister Guido Mantega has been quoted as saying that the levy has changed the "irrational course" of the markets and that the real currency is now less volatile.

Fund managers say the tax has also raised millions of dollars in government revenue.

"Has this tax made my life tougher? Definitely yes. Has it put me off investing in Brazil? Definitely not," said Jose Cuervo, who looks after $6 billion in Brazilian stocks at HSBC.

Cuervo says the 2 percent levy has to be seen against the backdrop of 20 percent-plus corporate earnings growth.

To avoid the tax but still invest in Brazil, he buys American Depositary Receipts in Brazilian firms instead of the underlying Sao Paulo-listed stocks where possible. ADRs are priced in dollars and enable investors to sidestep cross-border and cross-currency transactions.

The tax has also slowed some cash outflows.

"In the past when we sold positions in local bonds we would move returns back offshore into dollars. But now we look to keep the money onshore in Brazil," says Brett Diment, who oversees $5 billion in emerging debt at Aberdeen Asset Management.

Data from Indonesia, another popular emerging market, suggests steps enacted there in June may have helped push out some foreign accounts from short-dated debt.

Jakarta now requires buyers of one-month central bank bonds to hold them for at least 28 days, making the short-term debt less attractive to cut-and-run speculators.

Foreign holdings of six-month Indonesia bills surged 37 percent in July, data shows. As foreigners raised duration, one-month yields rose while six-month and one-year yields fell 25-30 bps.

"The results are in line with what the government wanted: more investors in longer-dated bonds, but at the same time foreign ownership of Indonesian bonds is at a record high," said Standard Chartered currency strategist Thomas Harr.

TOO SUCCESSFUL?

Ironically, investors fear the relative success of Brazil's levy may tempt the government to raise it further.

"Brazil's local bonds are among the most attractive assets in EM, but if the real breaks much higher the market will be concerned about further measures," Diment said.

"So from that point of view (the tax) has been a successful measure in that it is limiting currency appreciation."

Some also worry that countries such as Colombia or Peru could follow Brazil's example.

The Institute for International Finance has cut its 2010 forecasts for emerging market capital flows, citing fear of more controls.

Across emerging markets, flows into equities have dipped from last year's highs and currencies have weakened, while bond flows are at record highs. This is significant as equities are widely seen as a key destination for speculative cash.

Central bank reserve growth, often used for calculating the ebb and flow of hot money, has also slowed. Developing countries' reserves grew $80 billion in the first three months of 2010, IMF data shows, versus a $200 billion jump the previous quarter.

Still, analysts are reluctant to pin these developments entirely on capital controls, noting that the industrialized world's poor growth outlook is weighing on emerging markets and creating a friendlier environment for bonds than stocks.

"In the past whenever G3 growth collapsed, flows to EM have slowed," says Claire Dissaux, strategist at Millennium Global citing 1998 and 2002. "You would have to believe in true decoupling to expect flows to continue at the same level."

Emerging central banks say it is not currencies or portfolio flows that they aim to curb, though, but hot money flitting from market to market in search of yield -- the type of cash that is widely blamed for past emerging market crises.

They may be fighting an uphill battle as emerging interest rates are rising, creating a powerful driver for speculative capital seeking returns in short-term deposits.

But multilateral lenders' surprising endorsement of calibrated controls may be tacit acknowledgement that the curbs do indeed discourage hot money.

A February paper by IMF economists noted "an effect on the composition of inflows rather than the aggregate volume" resulting from such curbs -- just the result the emerging economies are looking for.

(Editing by Hugh Lawson)

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Roll Call Unfair, Cry Absentee Legislators

in BEI Index, Democracy, Good Governance, IDX, Indonesia Shares, Indonesia Stock Market, Society

Jakarta Globe, Anita Rachman & Markus Junianto Sihaloho, July 29, 2010

Representatives have claimed that measures taken to make them attend plenary sessions are "unfair'. (Antara Photo/Widodo S Jusuf)

Jakarta. Session-skipping lawmakers on Wednesday reacted with anger to the House of Representatives secretariat’s move to reveal their poor attendance records.

“The House secretariat released unconfirmed data, which is very harmful because once they get it wrong, any party could sue them for defamation,” the Golkar Party’s Agus Gumiwang Kartasasmita said, adding that the data on his absences was incorrect.

Earlier this week, the secretariat released information showing that none of the nine parties in the House has ever had all of its lawmakers in attendance at a plenary session.

The House Ethics panel threatened to discipline the truants and the public reaction has been sharply critical.

The data showed that dozens of lawmakers skipped plenary sessions, with 12 of them ducking out of three or more sessions.

Ratu Munawaroh from the National Mandate Party (PAN) missed 10 plenary sessions. Democrat Nurcahyo Anggoro was not present for eight.

The data also said Jeffrie Geovani from Golkar skipped six sessions, while his party comrades Agus and Ibnu Muzir missed four each.

“I have permits from the party to skip plenary sessions because I have work to do,” Agus said, showing a permission letter issued by the party.

He acknowledged there were lazy lawmakers who were truant for no good reason, but insisted he was not one of them.

Other lawmakers said the report was unfair because it measured only attendance at plenary meetings. Akbar Faisal from the People’s Conscience Party (Hanura), who missed six sessions, said he had good reasons for his absences.

“I worked on the Bank Century scandal. I had meetings until 2 a.m. sometimes. I was very tired so I couldn’t make it to the plenary sessions,” he said.

He said the House should have a mechanism other than attendance reports to assess lawmakers. “The most crucial [work] is in the commissions,” he said.

House energy chairman Abdul Kadir Karding from the National Awakening Party (PKB), who skipped four plenary sessions, said accusing him of being lazy was unfair because his contribution to the commission was being ignored.

“I am a commission chairman, I always lead meetings in my commission,” he said.

Democratic Party chairman Anas Urbaningrum said attendance was part of a lawmaker’s responsibility, and that his party pushes its members to show up.

“I often tell our members that many cadres with a better spirit stand ready to replace them as lawmakers,” Anas said.

He called on all parties to be stricter with their members.

Related Articles:

Less than 300 out of 560 legislators attend House plenary session

Indonesian Lawmakers Stall on Financial Disclosure

Legislators show positive reaction over critic on poor attendance

Absentee Legislators Called Out Of Order

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****Desired Characteristics for Potential Investment (Investment Philosophy of Magellan Infrastructure Fund)

in BEI Index, Good quality stocks, IDX, Indonesia Shares, Indonesia Stock Market, buying good companies, investment philosophy and system, investment strategies

Magellan Infrastructure Fund - Investment Philosophy

The Magellan Funds have two principal Investment Objectives:

to minimise the risk of permanent capital loss; and
to achieve superior risk adjusted investment returns over the medium to long-term.

Our Investment Philosophy is simple to state. We aim to find outstanding companies at attractive prices. We consider outstanding companies to be those that have sustainable competitive advantages which translate into returns on capital materially in excess of their cost of capital for a sustained period of time. While we are extremely focused on fundamental business value, we are not typical value investors. Securities that appear undervalued on the basis of a low price to earnings multiple or a price to book multiple will often prove to be poor investments if the underlying business is fundamentally weak and exhibits poor returns on capital. We will buy companies that have both low and higher price to earnings and price to book multiples provided that the business is outstanding and the shares are trading at an appropriate discount to our assessment of intrinsic value.

An outstanding company will usually have some or (ideally) all of the following characteristics:

WIDE ECONOMIC MOAT
An economic moat refers to the protection around an economic franchise which enables a company to earn returns materially in excess of the cost of capital for a sustained period of time.

Outstanding companies are unusual as capitalism is very efficient at competing away excess returns, in most cases. A company’s economic moat will usually be a function of some form of sustainable competitive advantage.

A strong indicator as to whether a company possesses an economic moat is the historical returns on capital (both including and excluding intangible assets) it has achieved. If a company has earned returns materially above the cost of its capital for a sustained period, it is a good indication that a company may have an economic moat. In some cases, a company may be developing a strong economic moat, but its historical returns on capital are low reflecting the investment in building a business with long-term sustainable competitive advantages. The key lesson is that historical returns on capital do not necessarily indicate whether a business has a wide economic moat and it is critical to fully understand the competitive advantages and threats which protect and threaten a company’s economic franchise.

Identification of companies with wide economic moats involves consideration and assessment of the barriers to entry, the risks of substitutes, the negotiating power of buyers and suppliers to a company and intensity of rivalry amongst competitors.

The following are illustrations of sustained competitive advantages:

Where it is very expensive for consumers to shift from the incumbent provider (that is, where there is a low threat of substitutes) because of, for example, cost, inconvenience and/or regulatory restrictions.
Where the leading market participant has material economies of scale which gives it a significant cost advantage over competitors or new entrants.
Where the business has a strong and unique brand name or is protected by long-term intellectual property rights such as copyright, patents, trademarks and/or regulatory approvals.
Where a company has a very strong network (ideally monopoly or proprietary). For example, where it is the vital intermediary between buyers and sellers, a market maker or even a ring road that tolls workers and businesses use as they move people and goods. We are particularly interested in networks where access, pricing and volume are subject to market forces and are not regulated in a materially adverse manner.
Where the use of psychological imperatives (such as, safety, exclusivity and quality) drives customer loyalty and enables companies to charge a premium for their products or services.

Each of these sustained competitive advantages is relatively unusual and it is particularly valuable where a strong competitive advantage prevails over a long period of time. Market-based monopolies and proprietary networks can provide the strongest and most sustainable competitive advantages, but are extraordinarily rare.

RE-INVESTMENT POTENTIAL
We seek companies that have a moderate to high potential to continue to re-invest capital into the business at high incremental returns.

We believe that conventional investment analysis fails to properly assess the potential of a business to deploy material amounts of additional capital into the business at attractive rates of return. This is a fundamental driver of value over time.

The most attractive types of companies are either:

Companies with wide economic moats which can continue to grow materially with very limited additional capital.
These companies will exhibit rising returns on capital employed. These types of businesses are extraordinarily rare and extremely valuable.
Companies with wide economic moats which have opportunities to deploy material amounts of capital into the business at high incremental rates of return. Examples include a strong retail franchise with substantial roll-out opportunity, or a retail banking or financial services franchise that can continue to grow its lending activities at attractive margins.

These types of businesses are rare and can be very valuable compounding machines. It is more usual to find businesses with wide economic moats which can only deploy very modest amounts of capital and exhibit modest growth potential. These businesses, while attractive, are less likely to be compounding machines than those with material high return re-investment opportunities.

We are therefore very focused on assessing a company’s ability to continue to re-invest free cash flow at high rates of return. It is factors such as, store roll out potential, global expansion potential, the size of the market and market share potential, and market growth rates, which will drive this re-investment potential.

We judge re-investment potential as low, medium or high depending on the level of re-investment over the medium term as a percentage of net income, and the rate of return expected to be achieved.

LOW BUSINESS RISKS
The purpose of assessing business risk is to determine the predictability of cash flow and earnings projections. Businesses which are difficult to predict or could exhibit large variations in cash flows and earnings have high inherent business risk.

We assess business risk taking into account factors such as cyclicality, operating leverage, operating margin, financial leverage, competitive strength, regulatory and political environment and profitability.

We assign each company a risk assessment: low, medium and high. This is not an attempt to measure the volatility of the shares, but rather the predictability and strength of the underlying business.

LOW AGENCY RISK
We term the risk surrounding the deployment of the free cash flow generated by a business as €˜agency risk’.

A fundamental assumption inherent in a standard discounted cash flow valuation (DCF) is that free cash flows are returned to shareholders or are re-invested at the cost of capital. The reality is that this assumption is often flawed as free cash flow is often not returned to shareholders but, rather, cash is re-invested by companies at returns below the cost of capital. In these cases, businesses can end up being worth substantially less than implied by a DCF analysis. We term the risk surrounding the deployment of the free cash flow generated by a business as agency risk.

A company which can deploy a substantial amount of free cash flow back into the business at attractive returns for a sustained period of time will almost certainly carry lower agency risk than a company which has limited opportunities to re-invest capital at attractive returns, unless the company is explicit about returning excess cash flow to shareholders via dividends and/or share buy-backs.

In assessing agency risk, we look at factors, including the structure and level of incentives offered to senior management, the level of share ownership by senior management and directors, the track record of management in pursuing acquisitions, the desire of management to grow their empire and the track record of management and the Board in acting in a shareholder friendly manner, including returning free cash flow to shareholders via share buy-backs and/or dividends.

The assessment criteria we apply in evaluating potential investments are depicted in the diagram here.

An ideal investment will normally have a number of combined favourable attributes operating together which would illustrate what Charlie Munger of Berkshire Hathaway describes as a Lollapalooza effect (which is a term for factors which will reinforce and greatly amplify each other).

MARGIN OF SAFETY
We will only purchase an investment when there is a sufficient margin of safety. The margin of safety is the discount we require before buying shares of a company. The bigger the assessed discount, the wider is our margin of safety.

The available margin of safety, we believe, is driven, in part, by prevailing market psychology. While not a driver of a company’s quality or intrinsic value, the markets can have a profound, albeit rarely long-term, effect on the pricing of a company’s shares. When short-term issues or concerns are worrying investors or other factors are resulting in excess enthusiasm (that is, irrational exuberance), shares will often be mis-priced relative to intrinsic value. While our process can make us appear to be out of step with trends, investing contrary to consensus thinking has the potential to provide investment opportunities. Understanding where current market sentiment lies and assessing the company within the context of whether the concern or excitement is being appropriately priced, is an important step in investing.

There are some exceptional businesses where the Lollapalooza effect is truly at work and the moat is so wide and the risks are so low that we will invest with a very modest margin of safety. It is more usual to find companies which do not have all the reinforcing factors at play which results in a higher level of risk and requires a higher margin of safety.

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Clerics take on corruption with fatwa on accountability

BEI Index

The Jakarta Post, Jakarta | Thu, 07/29/2010 9:01 AM

Charismatic Nahdlatul Ulama (NU) cleric Sahal Mahfudh has been re-elected chairman of the Indonesian Ulema Council (MUI), which wrapped up its national congress Wednesday with a number of new fatwas.

Some fatwas, including one concerning the need to apply the retroactive accountability principle in tackling corruption, have been lauded by the public as “progressive”, while others are said to be controversial.

Sahal, also chairman of NU’s lawmaking body, has held the position since 2000. Wednesday’s election will make him the longest serving leader of the MUI, which was jointly set up by representatives from the country’s major Islamic groups in 1975.

His predecessor, Ali Yafie, has chaired the council since 1990.

“The election for the members of the next MUI’s executive board began Tuesday night and finished at 7 a.m.

[Wednesday] morning,” Ichwan Syam, a member of a team tasked with forming the executive board, said as quoted by Antara.

The four-day congress also re-elected Din Syamsuddin, who was recently mandated to lead Muhammadiyah for the second time, as Sahal’s deputy. NU and Muhammadiyah are the country’s two largest Islamic groups.

The council produced seven fatwas during the congress. A fatwa is a legal opinion produced by a single or group of Muslim scholars. It is not legally binding and could be ignored as long as one has strong arguments to refute it.

One fatwa was made to push the law enforcers to apply the retroactive accountability principle. The council said Islam upheld presumption of innocence. In certain cases where an individual is alleged to have amounted wealth illegally, they are required to prove their innocence, the clerics said. A similar fatwa was issued by Muhammadiyah during its centennial congress in Yogyakarta early this month.

The MUI called for the revision of the country’s legislations to enable law enforcers to track down wealth from questionable origins of high ranking officials. Currently, when an official reports his wealth, the Corruption Eradication Commission, for example, cannot ask the person to explain the sources of accumulated wealth.

The council also urged housewives to ensure their husbands get their money through legal means.

“Women’s role is very strategic in many aspects of life, including in corruption eradication efforts,” the council’s propagation department head Amrulllah Ahmad said as quoted by detik.com.

Hasril Hertanto, a legal expert from the University of Indonesia said, “[The MUI] must provide arguments from the Islamic perspective, strengthening its calls using religious principles.”

People’s Consultative Assembly (MPR) deputy speaker Lukman Hakim Saifuddin also commended the council for supporting the nation’s anticorruption drive.

Responding to a recent controversy on if the government should censor gossip shows, the council declared watching them as forbidden according to Islam. The NU issued a similar fatwa in 2009 and Muslims apparently ignored it as so-called “infotainment” remains popular.

The clerics also issued fatwas banning sex changes and sperm banks. They also issued fatwas allowing pilots to break their fast while on duty as long as they pay compensation and the usage of breast milk banks.

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Coca Cola Business at a Glance

BEI Index

http://www.cokecce.com/crs-reports/2009/g_business_glance.html

Health is Wealth

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The company’s intrinsic value is the net present value of projected future cash flows.

BEI Index

http://rcrawford.wordpress.com/2008/08/05/teva-pharma-teva-august-4-2008/
The company’s intrinsic value is the net present value of projected future cash flows.
We will take the free cash flow rate and project it out over the next decade, followed by an assumed 5% growth rate in the second decade.

Valuing a firm using Free Cash Flows

Health is Wealth

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Free Cash Flow Yield trumps Dividends as a driver of returns

BEI Index

The chart below was adapted from research conducted by Empirical Research Partners – it depicts relative returns for U.S. large cap stocks sorted by dividend growth, share repurchases, and price/free cash flow over the 35-year period from 1970-2005.

You will notice the following:

Strategies focused only on dividend growth have only modestly outperformed the S&P 500 Index.
Companies that pay no dividends at all have the worst return records.
Strategies focused on price/free cash flow were the most effective at outperforming the S&P 500 Index.

Even in today’s severely compromised market environment, companies are fiercely protective of their free cash flow. Despite the downturn, free cash flow has held up remarkably well due to a couple of factors: a low capital expenditure base and aggressive management of working capital.

https://www.phn.com/Default.aspx?tabid=1103

Health is Wealth

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