Wednesday, March 4, 2015

GST - An Economics Perspective

Recently I did a sharing on the current hot topic GST (Goods and Services Tax) with a group of pre-University students. I presented my view from 3 perspectives namely: the Government, Consumers and the Producers. It was an interesting discovering for the students and I hope to share with my readers.

GST? Didn't we had it before?
The first confusion that the general public has is that the term GST is not something new to us, we have seen it on our bills when visiting restaurants and paying legal fees. The current GST stands for "Government Services Tax", which is applicable in the service industry and its chargeable to the final consumers. Starting April 1st, it will be replaced by the Goods and Services tax which is charged on every single stage of the provision of goods and services throughout the distribution chain. Under the new system, GST will be charged from the raw materials to the wholeseller,  wholeseller to the retailer, and retailer to the customers. However, as long as you are not the final consumers, meaning you are the business owners, you may claim back your GST on most goods and services. Hence "Government Service Tax" is charged to the final consumers, while the new GST is charged at every stage of provision of goods and services.

Do consumers bear all the tax?
This is an interesting question. From the media and most internet articles we were told that the GST is a consumption tax and its a tax on the consumers alone, and that the producers (business owners) are the middle men, they collect the GST from the customers and later pass on the tax revenue to the government. However from the economics perspective, this is not true.

From the diagram above, we can see that the imposition of a GST will ultimately increase the price while the economic transactions (or output) will reduce. The blue coloured rectangle represents the tax revenue collected by the government. However this tax revenue is not borne by the consumers alone, it is infact shared by both the producers and consumers. The exact tax burden borne is actually depends on the "elasticities" of demand and supply for the goods and services which is another story that I will not cover here.

How would the producers bear the tax, isn't it tax on the spending?
Precisely! Tax on spending! Whether you are a producer or consumer, you are taxed on the GST. The only difference is that producers can claim back their GST paid if they are a GST registered company.  However, some small items like furnitures or A4 papers are not claimable. Hence, cost of doing business will increase ultimately.

Inaddition, there is the "Compliance Cost" that most business owners have to face. Depending on your company's turnover, some may need to submit GST to the authority every month! To cater for this change, companies need to install special softwares and they may even hire more staffs to work on this compliance. Hence, this accounting burden is on the wholesellers and the retailers in general.

Does the economy as a whole benefit from GST?
From the above diagram, the red triangle represent "Deadweight Loss" (DWL) which means there is a loss in economic welfare due to the imposition of the GST or any indirect taxes such as sales tax, import tax and excise duty. This loss in welfare is translated into inefficient allocation of resources and the loss of consumers and producers surplus (benefits).

Is GST progressive or regressive?
Many people say that GST is good because it is progrogressive, meaning the rich pay more taxes, the poor pay less. However, as a percentage of income, this may not be true. Although the high net worth people pay more GST because they can afford more luxury goods, however, their spending on GST accounts only a small fraction of their household income. Whereas the lower income group spend more on GST as a percentage of their income. Hence it is regressive in nature!

If it is bad, why 160 countries in the world impose GST?
The biggest benefit is that it is a good source of revenue for the government. In some EU countries, GST revenue account for 15% - 30% of the total tax revenue. This will definitely elleviate our budget deficit problem. In the past, as an oil producing country, our Petroleum Income Tax revenue accounts for 14% - 30% of our federal tax revenue. Given that the oil price has plunged dramatically, it is the right time to implement the GST to elleviate the burden from the government.

In addition, with the imposition of GST, it is believed we can recover some tax revenue from the "black economy", economic activities that were under-declared previously.

Hence, from the macro level, the imposition of a GST will benefit the whole country because it is definitely a good source of revenue for the government, it can reduce our budget deficit and hopefully with the extra tax revenue, the people can benefit from it, be it in the form of better infrastructures, healthcare systems or educatuon systems.

On the micro level, business owners and consumers are likely to suffer in the short term to medium term as this is a sudden cost to the business community, they will experience a squeez in their profit margin, this will take some time for them to adjust, maybe one to three years time. As for the consumers, the lower income group will feel the pain more as the tax is unavoidable and it will increase their cost of living.

Tuesday, January 6, 2015

Financial Planning Q&A Part 2


Miss A is 30 years old with an annual income of RM40000. She has been in the work force for 5 years now, and she would like to buy a house for herself. Can she afford a house in KL?


In Malaysia, most house purchasing is through financing from banks. Hence, whether Miss A can afford a house depends on whether she can obtain a mortgage loan from the bank. In general, there are various ways for the banks to approve a mortgage loan, one way is the 1/3 rule, which is RM4000/3 to get the monthly affordable instalment of RM1300 for Miss A. 

Based on the table below, if Miss A’s monthly affordable instalment is RM1000, she can afford a RM220000 house. In KL, with rising house prices, Miss A can only afford a house in the subsales market in the suburban region. 


Like most women, Miss B is a shopaholic. She is 26 years old and she love to shop online. She knew clearly the culprit was her credit cards but she could not control herself and she was in great debt. Suggest ways to help her to change from a shopaholic to a savvy investor.


Online shopping indeed brings us convenience, however if we abuse it, it may bring us disasters! Miss B’s problem is twofold. First, she is addicted to shopping; Secondly, she has the wrong attitude towards credit cards.

It is widely believed that addicted to shopping is a form of behavioural problem. The victims believe shopping may bring them happiness, at the same time releases their stress and other problems. However, psychologists think otherwise. The doctors claimed that happiness derived from compulsive shopping can only be short-lived, it does not solve problems at all. A better way is to go out, engage in meaningful activities with friends, work place or even charitable organisations. This way, Miss B will shift her focus onto other people instead of “herself”, and the satisfaction derived from doing charity work is more meaningful.

Next, Miss B should learn how to control her compulsive buying behaviour by drafting a purchase list every time before she buys. This way she is able to differentiate clearly which items are the “needs” and which are the “wants”.  In addition, she should record all her expenses so that she can keep track of her own spending.

Finally, Miss B should understand that credit card is a tool for “payment”, not for “financing”. For a start, she should use cash to make payment instead of credit cards to control her purchases. With all these measures in place, I’m sure Miss B would transform herself from a shopaholic to a money savvy queen.

Friday, January 2, 2015

Financial Planning Q&A Part 1

Recently I was interviewed by a local Chinese women magazine - Citta Bella (January 2015 issue), and I thought I should translate the script into English to benefit more readers.

There are various investment products such as unit trust, bonds, equities, real estates, gold, and forex that are available to us, which type of investment is most suitable for lady beginners? What are the basic rules and myths that we need to pay attention to?

To rank the risk level for the above investment products from low to high are: debt securities, real estates,  unit trust, equities, gold, and forex. The lower risk instruments such as bonds and real estates may require huge capital of investment, while higher risk forex requires smaller capital as forex is traded on margin. Does that mean beginners with small capital are forced to invest in those higher risk forex, futures and penny stocks? Not really!

I would recommend the greenhorn ladies to go for unit trusts, blue chip stocks and physical gold investment.

Firstly, let me talk about the unit trusts. There are a wide variety of them with different investment themes, the most common ones are the local equities funds that invest mostly in the Malaysian equity market. Since 1999, the Malaysian equity market has been performing steadily compared to the regional markets. There are also some unit trusts that invested in government bonds and corporate bonds with annual returns close to the fixed deposit (FD) rate, so I wouldn’t suggest you to invest too much into these funds, just put your money in the FD, as there is not much difference. 

Alternatively, there are unit trusts that invest in foreign equity markets, these funds are more risky. Although the potential returns may be high but I would suggest not more than 30% of your portfolio into this type of unit trust.

Next, let’s talk about stocks! I would like to emphasize that not everyone is suitable for the stock investing. I have seen too many bad cases, for example, many beginners when first entering into the stock market, they would think that they are the Warren Buffett type – value investor. They would choose some blue chip stocks for a start, hoping to win big money! 

Usually the biggest mistake is their attitude! They always wish that the stocks would appreciate within the short term, but in reality, unless we are in a strong bull run, otherwise these blue chip stocks hardly move, sometimes they may drop in prices. These inexperience greenhorns get panic and they would sell off these good value stocks, in returns, they would listen to rumours and bought into “penny” stocks. Hence, they lose even more in the end, and they ended up paying heavy price for that!

Finally, let’s talk about the gold and forex. I would suggest to the beginners not to invest in forex as it is high risk and prices fluctuate a lot, you may end up having sleepless nights!  However, I do recommend gold investment, especially gold jewellery for the ladies! Last year I did mentioned gold price was volatile and it’s price has fallen quite a bit, this year, I believe the gold price may fall to a bottom this year, and that it would be a buying opportunity for those gold bugs again! Start buying gold in the 2nd half of 2015 or whenever you see a substantial fall in the gold price.

Saturday, December 6, 2014

Commodities Cycles

The followings are some slides that I presented to my graduates beginning of this year on January 25th.

Note that the above analysis are based on probablity not 100% guranteed. It is my way of telling readers that commodities go through cycles, just as any other financial assets. If we pay close attention to the historical charts, we can get insights from them.

Finally, one small note on the palm oil prices, although I believe the palm oil price may bottom out in September 2014, however, March 2015 there might be a test of this year's low. If you are thinking of accummulating more on plantation stocks, perhaps you might want to spread out the investment thtoughout 2015.

Saturday, October 11, 2014

A Market Correction or A Bear Market

The stock markets around the world have the biggest selloff since January this year. Many are wondering if this is just a normal correction or the beginning of a bear market. I would like to share with you some of my thoughts.

From the fundamental perspective, in order to initiate a bear market we need to see a “crisis”, it could be a financial crisis, political crisis, epidemic crisis or catastrophic crisis. On top of that, the most important factor is the investors’ sentiments towards the crisis. For example, we have the Ebola, the middle east political unrest and the European debt problems now, whether we view these problems seriously or shrugged off the news depends on our experiences towards these news. If we had similar experience towards certain news, we would probably react bearishly for a shorter period of time than news that are something new for us. Sometimes small news may trigger big reactions from market participants. I had some study on the effect of moon and the psychology of investors, and statistics did show that investors’ sentiments are easily influenced by the faces of moon and the eclipse of moon. If you are aware that we just had a lunar eclipse on October 8th and the stock market reacted bearishly around this date.  In some cases, if the selloff is severe, it may violate important trendlines and once the damaged is done, it is difficult to recover within short period of time.

From the technical perspective, it is “normal” to see a correction in stock prices once in every three month or so. This is due to profit taking when prices moved higher. In addition, in every few years we shall see some bear markets that last for months. In this article, I would like to share with you some simple statistics on a “market correction” and a “bear market”.

Market Correction
A market correction occurs every 2-4 months, and it usually lasts 2-8 weeks, prices may fall from 5%-15%. For KLCI, we hardly had any price correction that is more than 5% this year except in January, the correction lasted for 6 weeks,  and now our KLCI is quite close to the 5% correction.

Bear Market
While a market correction is considered “short term”, bear markets can be “medium term” or “long term”. Medium term bear market lasts for months, long term bear market last for years. The price fall is more drastic, we may see prices fall from 15%-60%. Although by definition, prices drop more than 20% is considered officially a bear market, but I do see 15% price fall that lasts for 6 months which is considered a medium term bear market. (e.g, the US debt crisis, KLCI 2011 Aug – 2012 Jan bear market).

Possible scenarios
I do not wish to speculate if this is a bear market, let’s hope that it is a market correction.
If we believe that we are now having a market correction, we shall see 2 -  8 weeks of market correction started from September 12, and the prices are stated below:

S&P 500: price fall 5% - 15% which is 1920 – 1720.
STI: price fall 5% - 15% which is 3200 – 2868.
KLCI: price fall 5% - 15% which is 1795 – 1606.

Time target: We have past 4 weeks, next week is the 5th week, and by Nov 7th that’s the end of 8th week. 

The above are relevant for index as the statistics are based on the indices historical charts. The study of index chart is to give investors an overall sentiment of the market.

Saturday, August 9, 2014

Correction Mode in the Stock Market

S&P 500: Looking at this chart, there is a bottom forming in August. As I said earlier, cyclical bottoms are months of Feb, May, Aug and Nov. If this low supercedes the previous low, then the whole picture of a bullish trend is in question, at least for the medium term. On the other hand, if this correction can stay above the 1890 level, then we shall see the next top above 2000 in October. In general, cyclical tops are: Jan, Apr, Jul and Oct, with accuracy of + or – one month.

KLCI Chart

STI Chart

STI & KLCI: are in the same boat as the US market which is forming a bottom in this August due to geopolitical unrest in the Middle East and Eastern Europe; the outbreak of Ebola disease in the African countries; and the earthquake and gas blasts in China and Taiwan. Investors are feeling very unease with these developments in the world that claimed thousands of people’s lives.

Locally between Spore and Msia, we are concerned over the massive toll hikes at the causeway that may long term effects on the economies of both countries.   Investors sentiments are dampened, Singaporeans who want to invest in the Iskandar will pull their hand brakes, transport related business suffered the biggest blow as their business cannot survive due to the new measures,  Johor poultry and construction sector will suffer as their costs of doing business have gone up and if they pass on the cost to the end users in Singapore, in the long run, the Singaporean customers will turn to other neighbouring countries for alternate supplies. 

The biggest hit would be the Johor property sector as in the past, the Singaporean investors accounted a big proportion in the sales of the residential and commercial properties in Johor Bahru.  The Singapore government even encouraged their SME sector to relocate from the Jurong industrial estate to the Iskandar region to enjoy the low cost environment. However, the new measures will definitely cause some dampening effect on the relationship between the two countries. 

In short, if we see low volume trading along with low prices, then this correction should be mild, with not more than 10% price correction. 

On the palm oil, currently the price is US$703/metric ton, which is still about 5% from the target price mentioned in my previous article. In terms of time frame, in my previous post I mention the third quarter which is Jul - Sept. Hopefully, it will be bottoming either this month or next month.

Finally, I want to stress that there is no one person in the world can predict the market with 100% of accuracy including myself. What I'm sharing in my blog is for educational purpose. The work that I publish here are my own research. I treat myself as a new student and I'm still learning in this long journey in the financial world.

Saturday, June 14, 2014

Palm Oil Price

Plantation sector indeed is quite a complicated sector to analyse fundamentally as there are a lot of complicated factors such as rainfall, stock pile, global demand, palm oil tree age yield and import duty & taxes that affecting the palm oil industry. These factors are extremely important to analyse individual plantation counters. Usually I don't do the analysis myself but to rely on a few reputable research houses for their indepth analysis. However, if you want to know the bigger picture such as the palm oil price trend in general, perhaps I can offer some help here based on my technical analysis knowledge.

Firstly, let's take a look at the 30 year palm oil futures price chart to establish a long term view on the palm oil price historically. From the chart we can see that there seemed to be a repetitive behaviour in the palm oil price. Measuring from bottom to bottom, the cycle years are either 3 or 4. If we were to take the last bottom year 2011 as a starting point, the next bottom should be either in 2014 or 2015 (3 or 4 years). However, with the trendline analysis, it is quite obvious that the bottom should be this year as that's where the trend line is.

Next, we want to know the price target by measuring from the double top formation formed 2010 - 2012. 
The minimum target is US$668 if we were to take the lower height of the twin peaks and the time frame is probably in the 3rd quarter by looking at the tendline above.

I want to stress that technical analysis is about probability not about certainty. We all want to trade with odds in our favour. Many people think that technical analysis is a hindsight theory, you only see it after it had occured. However, if you incorporate cycle analysis into your analysis, you may even forecast the future price trend with certain accuracy.

I hope this article will give you a good picture of the general price trend of the crude palm oil, for individual counters, you may read up the analyst reports from various research houses. Generally, plantation counters with younger aged palm oil trees (below 20 years) will generate higher yield. In addition, land bank is also an important factor to consider as it can be a great potential boost to the balance sheet should plantation companies revalue their lands. Finally, look not only the Malaysian plantation counters, but also the Singapore listed plantation stocks as well.