KUCHING: When there are uncertainties surrounding an economy, it is common to see investors and institutional funds moving their investments from the equity market towards assets that are deemed as safe havens.
As the equity and foreign exchange markets turned more volatile as a result of heightened risk-reward environment, fund managers looked to other asset class which provides stable and reasonable rate of return to grow their portfolios.
In general, gold is considered a safe haven asset to hold in times of greater volatility in the currency markets.
Following last month’s UK’s referendum to leave the European Union (EU) more commonly known as Brexit, gold prices rose to a two-year high of US$1,350 per ounce.
Market observers opined that the rise in gold price came amidst the plunge in the British pound sterling which hit a 31-year low against the US dollar subsequently after Brexit in addition to the uncertainty over the UK economy going forward.
They believed that gold is often favoured as a hedge against economic and financial uncertainty.
Some analysts have even forecast that the commodity had entered the early stages of the next bull run.
UBS strategist Joni Teves in a recent note to clients said she expects more gains for gold in the future.
“Key drivers (for gold) include low or negative real rates, the view that the US dollar has peaked against developed markets currencies and lingering macro economic risks,” she said in the note.
“We expect the next leg (of gold price) to be driven by an extension of the trend of strategic portfolio allocation into gold from a diverse set of investors.
“This trend should now deepen, attracting more participants and encouraging those who have been hesitating to get more involved.
“Relatively orderly retacements, which have typically been shallow and brief indicates strong buying interest.
“This suggests that gold’s floor is likely (to go) higher now given an even stronger fundamental argument for holding gold,” she said.
She raised her forecasts for gold to an average of US$1,280 per ounce from an average of US$1,225 per ounce.
Teves believed the average price of the bullion will move to US$1,340 per ounce with short-term growth leading the price of gold to as high as US$1,400 per ounce later this year. She also predicted the price of gold over the medium term will move to US$1,400, US$1,450 and US$1,475 in 2017, 2018 and 2019.
She opined that the UK’s vote to leave the EU has further supports gold’s macro narrative, reinforcing the themes of gradual shifts in monetary policies, consequently lower yields and more uncertainty.
Correspondingly, HSBC was another major banking group that foresees gold prices to move higher.
HSBC also in a note to clients said, “We continue to expect some of these factors, notably continued accommodative Fed policies and investor demand to support gold and add another reason to strengthen in the months ahead.
“(Also) increased demand for perceived ‘safe-haven’ assets following the UK’s vote to leave the EU,” it said.
Gold and other commodities
Meanwhile, OCBC Bank Treasury Research and Strategy in a report on June 30 said its prediction on gold price depends on the expectation of the US central bank, the Federal Reserve (Fed) in raising the interest rates.
The bank believed that gold price will react negatively if the US Fed decides to raise the federal funds rates as investors will shift their money into purchasing US bonds on better yield thus shunning investment in gold.
Nonetheless, it pointed out that the possibilty of further interest rates hike this year by the Fed has been reduced due to Brexit.
Its economist Barnabas Gan said, “Though at least one rate hike may still be possible, the drivers for gold is now two-fold; global risk appetite and dollar strength.
“Despite a rate hike by the Fed, should it come to pass, the risk-off sentiment from the suspense should dominate and lift gold price to US$1,350 per ounce handle easily into the year ahead.
“Should (Fed chairperson) Yellen fail to hike (the interest rates), gold prices would see further upside risk into the $1,400 per ounce region,” he said in a note to clients.
Aluminium price spurs Press Metal
Besides gold, OCBC’s Gan observed that the prices of other commodities such as aluminium have also increased.
He said the price of aluminium has grown by 8.53 per cent as of end of June while iron ore has jumped 24 per cent as of June 30.
On the local scene, one company which is riding on the uptrend of aluminium price is Press Metal Bhd (Press Metal).
The aluminium manufacturer’s share price has rose by 97 per cent to RM34.03 per share as of July 15 from RM2.05 per share recorded on Jan 4.
Additionally, sentiment for the company’s shares was boosted by a recent announcement of a proposed bonus issue and shares split exercise.
RHB Research Institute Sdn Bhd (RHB Research) in a report dated July 12 said Press Metal’s proposed share split and bonus issue was a welcome sentiment booster.
The research firm said the corporate exercise while neutral in terms of market capitalisation, was timely in improving the stock’s liquidity.
Apart from that, it noted Press Metal’s share price will be adjusted lower to reflect the bonus issue and shares split which will make it more affordable to retail investors.
Besides that, RHB Research said Press Metal has also proposed the transfer of its listing status to a new investment holding company by exchanging all its subdivided shares for shares in a new company (Newco).
Upon completion of the corporate exercise, the research firm noted Press Metal will become a wholly-owned subsidiary of the Newco.
The proposal, RHB Research noted will enable the Newco of Press Metal to streamline its business segments to enable flexibility for expansion when opportunities arise in the future.
The research firm opined that the creation of the Newco also safeguards the group from direct operating risks such as legal claims and litigation.
On Press Metal’s current development, the research firm said the group’s Phase 3 smelter in Samalaju was fully commissioned in late May 2016.
It added Phase 2 of the company’s smelter in Samalaju had also returned to normal operations in Nov 2015 after six months of repair work undertaken following a fire incident in May 2015.
RHB Research gathered that the company’s smelter in Mukah (Phase 1)was operating normally.
Thus, with Press Metal’s Phase 3 smelter in Samalaju which came on stream in late May 2016, the research firm observed that the group’s aluminium smelting capacity has increased to 760,000 tonnes pa (tpa) or approximately at 1.3 per cent of global primary aluminium production.
Owing to increased capacity production, RHB Research expects Press Metal’s sales tonnage to surge by 65.7 per cent and 11.8 per cent y-o-y in financial year 2016 (FY16) and FY17 respectively.
In spite of that, the research firm noted the aluminium smelting business is typically vulnerable to fluctuations in the prices of the commodity.
Although the prices of commoditiy remained volatile, it observed that most metal prices have rebounded post Brexit.
“We believe that aluminium prices have a limited downside from the present levels.
“That said, as Press Metal’s smelting cost is within the first quartile of the global cost curve, it is able to better withstand any pressure stemming from distressed prices when compared to its peers,” the research firm said.
Meanwhile, during the announcement of the company’s first quarter financial results ended March 2016 (1Q16) in May 2016, Press Metal said the supply and demand for aluminium were more in equilibrium and was being reflected in the price level.
Press Metal believed the price recovery will work out well for the group as the company will complete its third smelter production ramp up by the end of May.
It estimated that the company’s total smelting capacity of 760,000 tpa will be the largest in Southeast Asia.
For 1Q16, Press Metal said revenue grew by 22 per cent year-on-year (y-o-y) to RM1.29 billion while earnings soared by 119 per cent y-o-y to RM94.56 million.
The company explained that the higher revenue generated for 1Q16 was attributed to the additional output by its Samalaju new phase which has been commissioning progressively.
Press Metal noted the higher profit recorded for 1Q16 was partly contributed by the increase in production output and lower finance costs incurred resulted from the settlement of certain higher interest bearing debts.
Moreover, the company expounded that the ‘extraordinary earnings’ for 1Q16 included the payment of a second interim insurance claim of RM50 million in relation to the fire incident occurred at its Samalaju Smelter in May 2015.
Borneo Oil benefits from rising gold prices
At the same time, another company which has been benefiting from the recovery of commodities prices is Borneo Oil Bhd (Borneo Oil).
The company recently said its subsidiary company Borneo Oil & Gas Corporation Sdn Bhd has taken advantage of investing in gold for the past year in the belief that low gold prices were temporary as it was traded below the industry mining and production costs.
“The investment has proven correct as gold prices have increased substantially due to many uncertainties in the financial markets.
“The company’s other operations are in gold mining and investments apart from limestone and energy related activities currently being carried out.
“The current operating mines of the group are located at Merapoh and Bukit Ibam, both in Pahang.
“Explorations are currently ongoing for hard rock gold for both the mines,” the company said.
Borneo Oil added for both mines, mining and production of gold were conducted mainly on alluvial and colluvial ores.
The company explained that unlike a typical exploration mining company where there was no revenue during exploration stage until the discovery of an economical ore reserves, the group’s business philosophy of “taking the low hanging fruit” has started mining operations on alluvial and colluvial gold ore.
Hence, with its ‘timely’ venture into gold mining in the past year, Borneo Oil in a filing to Bursa Malaysia on June 30 said its 1QFY16 ended April 2016 revenue witnessed a substantial jump to RM1.49 billion from RM14.63 million recorded in 1QFY15.
Correspondingly, Borneo Oil added net profit shot up by 1,938 per cent y-o-y to RM10.7 million from RM525,000 recorded in 1QFY15.
Borneo Oil explained that the substantial jump in revenue for 1QFY16 was due to the sale of gold investments.
Likewise, the company in its 2016 Annual Report said venturing into gold mining and the accumulation of gold will be the group’s main emphasis at the current moment until such time that the world economy will realise its true value.
Borneo Oil revealed that as at March 31, 2016, the group holds 18,863.14 ounce in gold inventory amounting to US$24.14 million at US$1,280.00 per ounce.
The company further said that its mining operations in Merapoh have progressed steadily and have produced approximately 27.35 kg over the last financial year.
For the Bukit Ibam mine, Borneo Oil is confident that the group will recover more gold from the tenement and have set a realistic recovery target of 60 per cent of gold from the gold bearing ores through a non toxic leaching process.
“The group holds the view that gold should be treated as a perpetual asset to back its shares and to be cashed only when there is profit or through the sale of it through gold convertibles.
“The group is now studying how best it is to utilise this inventory,” the company said.
Moving on to other commodities, Gan noted that China’s imports of iron ore has been positive for seven months already since November 2015 while copper moved into double-digit growth in early 2016.
Interestingly, Gan pointed out that the prices of base metal were largely unaffected by the Brexit referendum, with copper prices wiping off the losses within 72 hours after the results of the referendum.
He observed that the gains in base metal prices were not surprising, given China’s imports on the commodity class has remained in positive territory.
“While some of the recovery can be attributed to the need for an ‘orderly’ exit by Britain from the EU, the notion that base metal prices are largely influenced by the health and demand of the Chinese economic growth served as an overall support to prices itself.
“Barring a disorderly post-Brexit and any subsequent extreme risk-aversion from such a scenario, global growth should remain on track.
“On this, we remain comforted by the tremendous progress made by the US economy over the past several years, seen from the significant job gains, rising household incomes and falling unemployment rates.
“With such a base-case scenario, we do expect base metal prices to see further gains into second half of 2016 (2H16),” Gan said.
REITs as safehaven investment
Moreover, real estate investment trust (REIT) was also considered as one of the safe haven assets during financial markets uncertainties.
This is because REIT provides income to investors in the form of dividend and the price movement of REITs stocks were quite stable.
The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) in a report said the fundamental of Malaysian REITs under its coverage remained intact as REITs do not have exposure in Britain and European countries amid the UK referendum.
The research firm observed that REITs – especially Malaysian ones – have been benefiting from the ‘flight to safety’ during financial market uncertainties arose by Brexit, due to its characteristics of high defensiveness and low risk which implied lower sensitivity to global market movement.
MIDF Research observed that the strong performance of listed M-REITs earlier this year was attributed to yield seeking sentiment among investors in an uncertain economic environment.
On top of that, the research arm of UOB Kay Hian (Malaysia) Holdings Sdn Bhd (UOB Kay Hian Research) in a strategy report said given the benchmark index FBM KLCI’s lacklustre performance in 1H16, REITs delivered a commendable performance and outperformed the return of the FBM KLCI.
The research firm observed that the sector’s strong performance was driven by a subdued economic growth – both on the domestic and global fronts, lack of compelling alternative ideas, for instance low-risk investments that provide adequately high yields and growing concern in view of a mild interest rates hike cycle from the Fed.
UOB Kay Hian Research observed that all six REITs under its coverage, Axis REIT, Capitaland Malaysia Mall Trust (CMMT), IGB REIT, KLCC REIT, Pavilion REIT and Sunway REIT registered positive relative share price returns.
Significanlty, the research firm highlighted that IGB REIT emerged as the top performer, with a return of 18 per cent due to its resilient assets which registered solid rental reversion as well as highest sales growth recorded in 2015.
“We expect IGB REIT to continue its stellar performance driven by strong connectivity, prime location and large catchment from offices as well as Cititel and Boulevard Hotel in MidValley City.
“We think the sector will remain defensive as its dividend yields are still hovering at 5.4 per cent and 5.8 per cent for 2016 and 2017 respectively.
“We continue to like retail REITs as they command higher earnings growth on the back of higher rental reversion as compared with office, industrial and hospitality REITs,” UOB Kay Hian Research said.
On another note, analysts opined that the stable Malaysia Government Securities (MGS) yield has kept the attractiveness of REITs intact whereby the positive spread between dividend yield of REITs and MGS yield was sustained.
They observed that the MGS yield was fairly stable despite the weakening ringgit, indicating resilient demand for MGS as investors flocked to safe-haven assets.
The research division of CIMB Investment Bank Bhd (CIMB Research) in a report dated July 13 said the yield for the 10-year MGS recently moved around 3.7 per cent, down 0.7 percentage points from its peak of 4.4 per cent in August 2015.
The research firm outlined that the widening yield spread and cheaper cost of debt is positive news for the REITs.
Concurring with CIMB Research, UOB Kay Hian Research in a report dated July 15 opined that the the decline in MGS yield with the recent overnight policy rate (OPR) cut would create a wider spread between REIT and MGS yields, and hence make REITs more appealing.
Historically, the research firm observed the yield spread between MGS and REIT has been narrowing at an average of 2.90 percentage points and 2.03 percentage points in 2014 and 2015 respectively.
UOB Kay Hian Research believed that the narrowing yield spead trend could reverse after the OPR reduction although the year-to-date spread has narrowed further to 1.63 percentage points.
HLIB Research cited another near term potential catalyst for the sector is the possible revision of REIT guidelines by the capital market regulator, the Securities Commission (SC) to allow for green development up to certain percentage of total assets value, similar to Singapore and Hong Kong, who allows development up to 25 per cent and 10 per cent of the REITs’ total value, respectively.
Coincidentally, the SC is seeking feedback from the public on a proposed enhancements to REITs guidelines.
The SC in an announcement last Thursday explained that the proposals are part of its efforts to facilitate growth of the maturing REITs market in Malaysia in a manner that promotes stronger governance practices and instills greater market confidence.
The SC said, “A key aspect of the enhancements is to allow REITs to invest in a wider range of real estate asset classes.
“It is proposed that REITs be allowed to acquire vacant land and also undertake property development subject to a cap of 15 per cent of their total asset value.
“It is also proposed that REIT managers be allowed to enter into long term leases with registered proprietors of real estate.
“In tandem with facilitating growth for REITs, the SC is proposing to strengthen corporate governance practices and enhance the level of disclosures and reporting to unit holders,” the capital market regulator said.
The SC further said as both REITs and listed corporations are traded on the stock exchange, the capital market regulator was also looking at streamlining the post-listing requirements for REITs with listed corporations by applying the Main Market Listing Requirements of Bursa Securities Malaysia Berhad to REITs, with specific enhancements where appropriate.
The SC added, “The streamlined post-listing requirements are expected to achieve greater market efficiency for REITs and also simplify investing in REITs for investors,” it said.
Therefore, with the regulator coming up with more measures to enhance the REITs sector, analysts were positive on the move.
They believed the recent rally in M REITs might still have more room to grow while some analysts opined that the low interest rate environment might prompt REITs to acquire more assets to enhance the income of their businesses.
These factors, they believed could become the re-rating catalyst for the REITs sector in the near future.