Indonesian Stock Market » bonds

Analysis: Emerging market capital curbs may be just the ticket

Cempaka — Thu, 29 Jul 2010 09:50:00 +0000

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)

S&P 500 Dividend Yield versus 10 Year Treasury Yield

bullbear — Sat, 24 Jul 2010 09:59:00 +0000

The 10 year U.S. Treasury yield has been greater than the S&P 500 Index dividend yield since 1958. However, in November 2008 the roles reversed when the S&P 500 yielded more than 10 year Treasuries. The chart above compares these yields from November 1993 to November 2008. Why do stocks, as represented by the S&P 500 Index, now yield more than bonds, as represented by the U.S. 10 Year Treasury?

Experts differ on the reasons, but one reason is simply market forces. The 10 year U.S. Treasury yield has been driven down as investors have moved out of stocks and into the safety of U.S. Treasuries, driving bond prices up. Bond yields go down when bond prices go up. The S&P 500 dividend yield has increased due to the recent sharp declines in stock prices. Dividend yield represents the trailing annual dividend per share divided by the current share price. Current stock prices have dropped at such a sharp rate that when dividing trailing annual dividends by current price, the dividend yield increased.

http://www.icmarc.org/xp/rc/marketview/chart/2008/20081212SP500DividendYield.html

Common stock dividends, an old idea for retirement income, are in vogue again

bullbear — Sun, 25 Apr 2010 04:52:00 +0000

By Tom PetrunoMarket Beat

April 24, 2010

What will you do for income in retirement?

Draw a pension, if you're very lucky. Collect Social Security. Beyond those two sources of money, most people will have to rely on their savings — bank accounts, investments, home equity or an annuity.

And the challenge for many American retirees won't just be to generate income from their nest egg, but to generate rising income to keep up with inflation.

Looking for a strategy to fill that bill, some investment advisors are turning to a solution that was familiar to Eisenhower-era retirees but increasingly has been lost on generations since then: common stock dividends from big-name companies, which in this era means firms such as Johnson & Johnson, H.J. Heinz Co. and utility PG&E Corp.

"We're pushing this idea with clients now," said Rich Weiss, who as chief investment officer at City National Bank in L.A. oversees about $55 billion. "There's a great case to be made for it."

It isn't difficult to find shares of brand-name consumer products companies with annualized dividend yields of 3% to 3.5%. (A stock's yield is the dividend divided by the current share price.) Yields on utility shares average about 4.4%.

Those dividend returns compare with an interest yield of about 2.6% on a five-year U.S. Treasury note.

Yet the dividend story is likely to be a very hard sell with many people, for eminently understandable reasons.

Retirement is supposed to be about financial stability and reduced investment risk. After the stock market crash of late 2008 and early 2009 — the worst decline since the Great Depression — equities naturally seem dicier than ever to countless Americans.

That's why people have turned to bonds in huge numbers, pumping hundreds of billions of dollars into bond mutual funds over the last 15 months.

Agreed, bonds almost certainly will be a safer place for your money than stocks, particularly over any short time period. But if it's income you're going to need in retirement, bonds aren't the slam-dunk answer they may seem to be.

One reason is that, thanks to the Federal Reserve's cheap-money policies and investors' rush for havens over the last year, interest rates on many types of bonds are well below where they were for most of the last 15 years. So you're starting out with a smaller income reward.

More important is that once you buy a fixed-rate bond (or a bank CD, for that matter), your yield is set until the security matures.

As Kurt Brouwer, principal at financial advisory firm Brouwer & Janachowski in Tiburon, Calif., puts it: "The issuer of a bond is never going to call up and say, ‘We want to pay you more.' "

What about bond mutual funds? Fund investors' income can rise over time if market interest rates go up and the fund buys new bonds paying higher yields. But predicting future interest payments on a fund in a rising rate environment isn't easy because of all the variables involved — including the types of bonds the manager buys, their maturities and whether the fund has more cash leaving than coming in.

And of course you face the risk that higher market interest rates will devalue older, lower-yielding bonds in a fund, depressing the value of your shares.

Dividend-paying stocks, by contrast, can offer what individual bonds can't: the potential for rising income over time, offsetting or more than compensating for inflation.

Healthcare products company Abbott Laboratories, for example, has lifted its dividend 60% since 2005, from an annual payment of $1.10 a share that year to the current annual rate of $1.76. Johnson & Johnson's dividend has risen 71% in the same period; Heinz's payout is up 47%.

All three dividends far outpaced the U.S. consumer price index, which rose about 13% in that period.

But if only the dividend story were that simple, everyone would buy into it. Although your income may rise with a dividend-paying stock, there is the ever-present risk that the share price itself, in the short run or long run, could lose far more than any dividends you'll earn.

The other major risk is that companies can cut their dividends. Some very big firms, including General Electric Co., Macy's Inc. and CBS Corp., did exactly that in 2008 and 2009 as the recession devastated their earnings.

Worse, many banks either slashed or eliminated their payouts altogether. The financial industry had long been one of the favorite sectors of dividend-seeking investors.

So why take a chance on dividend-paying stocks now? Because amid the economy's recovery more companies are boosting their payouts. A total of 284 U.S. firms lifted their dividends in the first quarter, up from 193 in the year-earlier quarter, according to Standard & Poor's. And the number of firms reducing or omitting their dividends plunged to 48 last quarter from a horrid 367 a year earlier.

Also, the Obama administration has signaled that it wants to largely preserve the favored tax treatment of dividends as put in place by President George W. Bush. The Bush tax cuts expire at the end of this year, but Obama supports keeping the dividend tax rate at 15% for couples earning less than $250,000 a year.

For investors who own stocks and bonds outside of tax-deferred retirement accounts, the Bush tax cuts gave dividends a huge advantage over bond interest, which is taxed at ordinary rates.

Josh Peters, who tracks and recommends dividend-paying stocks for investment research firm Morningstar Inc. in Chicago, says his frustration at the moment is that he views most solid dividend-paying stocks as fairly priced, at best — meaning it's hard to find genuine bargains after the market's 13-month surge.

That means the same would be true of the dividend-focused mutual funds and exchange-traded funds that offer an easy way for small investors to invest for dividend returns, albeit without the level of control they'd have by building a portfolio of 15 to 20 individual stocks.

Still, Peters expects that some of his favorite dividend-growth plays, including Waste Management, food-service-industry products distributor Sysco Corp. and payroll-services firm Paychex, will be able to boost their dividends at least 7% a year over the next five years.

He believes that more investors nearing retirement will begin to focus the power of dividend growth in a diversified portfolio.

"I think baby boomers will realize that if they need growth of income they can't just do the bond thing," he said.

tom.petruno@latimes.com

http://www.latimes.com/business/la-fi-petruno-20100424,0,1332567,full.column

Buffett: ‘Investments in bonds’ and ‘Corporate dividend policies’

bullbear — Wed, 31 Mar 2010 16:02:00 +0000

We saw Warren Buffett put forth his views on the concept of 'economic goodwill' and why he prefers companies that have a high amount of the same. Let us now see what the master has to offer in terms of investment wisdom in his 1984 letter to the shareholders.

While Buffett has devoted a lot of space in his 84' letter to discussing in detail, some of Berkshire's biggest investments in those times, but as usual, the letter is not short on some general investment related counsel either. In a rather simplistic way that only he can, the master gives his opinion on a couple of extremely important topics like 'investments in bonds' and 'corporate dividend policies'. On the former, he has to say the following:

"Our approach to bond investment - treating it as an unusual sort of "business" with special advantages and disadvantages - may strike you as a bit quirky. However, we believe that many staggering errors by investors could have been avoided if they had viewed bond investment with a businessman's perspective. For example, in 1946, 20-year AAA tax-exempt bonds traded at slightly below a 1% yield. In effect, the buyer of those bonds at that time bought a "business" that earned about 1% on "book value" (and that, moreover, could never earn a dime more than 1% on book), and paid 100 cents on the dollar for that abominable business."

Berkshire Hathaway in 1984 had purchased huge quantities of bonds in a troubled company, where the yields had gone up to as much as 16%. While usually not a huge fan of long term bond investments, the master chose to invest in the troubled company because he felt that the risk was rather limited and not many businesses during those times gave as much return on the invested capital. Thus, despite the rather limited upside potential, he went ahead with his bond investments. This is further made clear in his following comment:

"This ceiling on upside potential is an important minus. It should be realized, however, that the great majority of operating businesses have a limited upside potential also unless more capital is continuously invested in them. That is so because most businesses are unable to significantly improve their average returns on equity - even under inflationary conditions, though these were once thought to automatically raise returns."

Years and years of studying companies had led the master to conclude that there are very few companies on the face of this earth that are able to continuously earn above average returns without consuming too much of capital. Indeed, such brutal are the competitive forces that sooner or later and in this case, more sooner than later that returns for majority of the companies tend to gravitate towards their cost of capital. If we do a similar study on our Sensex, we will too come to the conclusion that there are not many companies that were a part of the index 15 years back and are still a part of the same index. Hence, while valuing companies, having a fair judgement of when the competitive position of the company, the one that enables it to consistently earn above average returns is likely to deteriorate. This will help you to avoid paying too much for the company's future growth.

After touching upon the topic of bond investments, the master then gives his take on dividends and this is what he has to say:

"The first point to understand is that all earnings are not created equal. In many businesses particularly those that have high asset/profit ratios - inflation causes some or all of the reported earnings to become ersatz. The ersatz portion - let's call these earnings "restricted" - cannot, if the business is to retain its economic position, be distributed as dividends. Were these earnings to be paid out, the business would lose ground in one or more of the following areas:

its ability to maintain its unit volume of sales,
its long-term competitive position,
its financial strength.

No matter how conservative its payout ratio, a company that consistently distributes restricted earnings is destined for oblivion unless equity capital is otherwise infused."

While the master is definitely in favour of dividend payments, he is also aware of the fact that not all companies have similar capital needs in order to maintain their ongoing level of operations.

Hence, in cases where businesses have high capital needs, a high payout ratio is likely to result in deterioration of the business or sooner or later will require additional capital to be infused.
On the other hand, companies that have limited capital needs should distribute the remaining earnings as dividends and not pursue investments which drive down the overall returns of the underlying business.
In a nutshell, capital should go where it can be put to earn maximum rate of return.

He then goes on to add how his own textile company, Berkshire Hathaway, had huge ongoing capital needs and hence was unable to pay dividends. He also further adds that had Berkshire Hathaway distributed all its earnings as dividends, the master would have left with no capital at all to be put into his other high return yielding investments. Thus, by not letting the operational performance of the company deteriorate by retaining earnings and not distributing it as dividends, he was able to avoid a situation in the future where he would have had too put in his own capital in the business.

http://www.equitymaster.com/detail.asp?date=8/16/2007&story=1

PLN to issue Rp 3 trillion in bonds this quarter

admin — Tue, 23 Mar 2010 05:36:09 +0000

State power firm PT Perusahaan Listrik Negara (PLN) plans to issue Rp 3 trillion (US$ 330 million) in bonds between June and July this year.

Second retail sukuk sell like hot cakes, bids reach Rp 8.03t

Cempaka — Tue, 09 Feb 2010 16:50:00 +0000

Aditya Suharmoko, The Jakarta Post, Jakarta , Tue, 02/09/2010 8:59 AM

Retail Islamic bonds sold like hot cakes, with bids reaching Rp 8.03 trillion (US$851 million), almost tripling initial targets of Rp 3 trillion, when the high-yield bonds were introduced onto the market on Monday.

The Finance Ministry’s director general of debt management, Rahmat Waluyanto, said the ministry would introduce a maximum limit on the purchase of retail sukuk after an investor placed an order worth Rp 25 billion in the bond coded SR-002, which is designated to individual investors.

“We have not yet decided the limit,” said Rahmat, adding the ministry would use the Rp 3 billion limit placed on the retail bonds as a benchmark.

Rahmat said that the investor who bought Rp 25 billion in retail sukuk might shift funds from the currently-shaky stock market.

The ministry wants to develop domestic investors in the bond market to help strengthen the government’s bonds against volatility resulting from the movement made by foreign investors.

The second retail sukuk, designated for retail investors, received a total order of Rp 8.75 trillion, the ministry said. The sukuk offer 8.7 percent yield, maturing in 2013.

The first retail sukuk issued in February last year were also a hit, absorbing a total order of Rp 5.56 trillion, about three times its initial target of Rp 1.77 trillion.

Rahmat said the government still has an option to sell Islamic bonds worth about Rp 17 trillion to help finance the state budget.

He did not mention when the government would conduct the next sale of retail sukuk, but saying that the global sukuk would be launch early in the second half this year to cope with the budget deficit.

“It will be before Ramadan,” he said.

Last month the government sold $US2 billion worth of 10-year dollar-denominated bonds.

Rahmat said the government would also issue yen-denominated samurai bonds sometime in the first half this year to help plug the 2010 budget deficit of Rp 98 trillion.

The ministry also has sukuk sale via auction conducted once a month, said director of sharia financing policy Dahlan Siamat.

Recent upgrades in Indonesia’s ratings by international agencies have attracted foreign capital inflows. Last month Fitch Ratings upgraded Indonesia’s ratings from BB to BB+, one level below investment grade, citing the country’s resilience to the global financial crisis.

Yesterday’s sale of retail sukuk attracted 17,231 investors, more than the 14,295 investors purchasing the first retail sukuk.

Investors with an age from 41 to 55 years old -- comprising 40.79 percent of total investors -- bought the most retail sukuk, of 35.32 percent of the total volume of Rp 8.03 trillion.

The Finance Ministry also picked the best three selling agents: Bank Mandiri, Bank Negara Indonesia and Bahana Securities to sell the retail sukuk.

Indonesia, the world most-populous Muslim nation, is tapping individual investors after it was forced to scale back an overseas debt sale as it seeks to alleviate its budget deficit.

Sales of sukuk may increase 24 percent to $25 billion this year, led by Southeast Asia, CIMB Group Holdings Bhd., the leading broker of such issuances, said last week.

“Demand is strong because the government is paying a bit of an extra yield from what you can get in the secondary market,” said Suryandy Jahja, managing director at PT Kresna Graha Sekurindo in Jakarta.

“Sukuk are special products that appeal to a lot of retail investors in this country and there’s a lot of untapped cash in the system,” he was quoted as saying by Bloomberg.

Indonesia has projected a budget deficit of Rp 98 trillion this year, equivalent to about 1.6 percent of gross domestic product. The shortfall was Rp 87.2 trillion in 2009, according to the Finance Ministry.

Pertamina appoints HSBC, Citibank, Credit Suisse as bonds underwriters

admin — Thu, 04 Feb 2010 03:28:45 +0000

State oil and gas company PT Pertamina announced that it has selected Citibank, HSBC, and Credit Suisse as underwriters in a plan to issue dollar-denominated bonds amounting between US$1 billion to

PLN may issue more bonds this year

admin — Tue, 02 Feb 2010 10:12:44 +0000

State power firm PT Perusahaan Listrik Negara (PLN) may once again issue bonds this year to fund its electricity transmission and distribution, a director said.

Reviewing the basics of interest-bearing investments

bullbear — Sun, 31 Jan 2010 00:20:00 +0000

To have a good understanding of interest-bearing investments, learn and know the followings.

The risks of interest-bearing investments, for example:

inflation,
interest rate cycles and
dubious borrowers with poor credit ratings.

The advantages of investing in this asset class, particularly

the interest income on which you can rely.

Some of the main interest-bearing investments in the market. These include:

cash,
money market funds,
bonds,
participation mortgage bonds and
voluntary purchased term annuities.

You have to know about two new market places other than the stock market:

the money market, where short-term interest-bearing secuities are traded, and
the bond market, where longer-term interest-bearing securites such as bonds are traded.

Mistakes to avoid when investing in interest-bearing instruments

bullbear — Sun, 31 Jan 2010 00:07:00 +0000

Interest-bearing investments may be relatively stress-free, but they too have their pitfalls. Watch out for the following:

Do not accept the first interest rate you are offered. Compare interest rates, negotiate where possible and find out more about fixed versus fluctuating interest rates and the term of fixed-interest investments.
Do not think interest-bearing investments are safe, risk-free havens. Remember the impact of inflation.
Do not forget about interest rate risk. When interest rates increase, bond prices will decrease, resulting in a loss on your investment. The longer the term of the bonds, the greater the drop in the market price.
Do not invest in bonds without understanding the terms of the bonds and the interest rate environment. Invest in well-known and reputable bonds rather than in unknown corporate bonds.