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Dr.

Nathrah Yacob

31 May 2018, 3pm (word count 2650)

Frederick Carine Tee Wei Xuan


31/5/18
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Table of Contents

Assignment  Cover  Page  ..........................................................................................................   1  


List  of  Tables  and  Figures  ........................................................................................................   5  
1.0  Economic  and  Industry  Analysis  ........................................................................................   6  
1.1Exchange  Rate-­‐  Consumer  Cyclicals  Industry  .........................................................................................................  7  
1.2  Interest  Rate-­‐  Financial  Industry  ................................................................................................................................  8  
1.3  Medical  Cost  Inflation-­‐  Healthcare  Industry  .......................................................................................................  10  

2.0  Indicator  Analysis  Within  Each  Industry  ...........................................................................  12  


2.1Indicators  Chosen  .............................................................................................................................................................  12  
2.2  Company  Comparison  and  Choosing  Within  Each  Industry  .........................................................................  14  
2.2.1  Consumer  Cyclical  Industry  ...................................................................................................................................  14  
2.2.2  Financial  Industry  .......................................................................................................................................................  15  
2.2.3  Healthcare  Industry  ...................................................................................................................................................  16  
2.3  Portfolio  Composition  ...................................................................................................................................................  17  

3.0  Conclusion  .......................................................................................................................  18  


3.1  Justification  of  Performance  .......................................................................................................................................  18  
3.2  Recommendations  ..........................................................................................................................................................  21  

4.0  List  of  References  .............................................................................................................  22  

5.0  Appendices  ......................................................................................................................  24  

Turnitin  Originality  Report  .....................................................................................................  27  

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List  of  Figures  

Figure  1.  FTSE  Bursa  Malaysia  KLCI  from  1977  to  2015     6  
Figure 2. Malaysia Benchmark Interest Rate in 10 Years   8  
Figure 3. Overview of IHH Healthcare Bhd revenue composition   10  
Figure 4. Portfolio composition- shares allocation mix of ALLI, AIRA and IHHH   17  
   
Figure 5. Stock Performance of Three Selected Companies.(21th May to 25th May )   18  
Figure 6. KLSE stock movement from 21th May to 30th May   19  
     

List  of  Tables  

Table 1: Three Ratios of $AIRA, $HUIN, $AMWA   14  


Table 2: Three ratios of $ALLI, $APES, $DAIM   15  
Table 3: Three ratios of $IHHH, $HTHB, $TPGC   16  

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1.0 ECONOMIC AND INDUSTRY ANALYSIS

The stock market act as a significant indicator for a country’s economy, it is a place and facilities
for investors to issue, buy and sell stock to trade on a stock exchange. It assists to provide
capital for company to fund and expand their business and provide opportunity for investors to
share in the profits of publicly traded companies. Over the past few decades, there are many
studies on the determinants of stock markets, which especially affected by macroeconomic
variables, such as exchange rate, interest rate and inflation. Macroeconomic variables had been
proved to affect stock market performance significantly (Ullah et al, 2017). Based on the line
graph in Figure 1, the overall performance of Malaysian stock market is fluctuating growing
trend, where the highest index point is 1887.07 on 2014 while the lowest index point is 89.04 on
1977. This study will be using top-down analysis to examine the external factors that affecting
three chosen industries listed on Bursa Malaysia, which include consumer cyclical industry,
financial industry and healthcare industry.

Figure 1: FTSE Bursa Malaysia Kuala Lumpur Composite Index (KLCI) from 1977 to 2015
Source: Trading Economics

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1.1 EXCHANGE RATE - CONSUMER CYCLICALS INDUSTRY

Exchange rate is the first external factor that would significantly influence the performance of
Malaysian stock market. It refers to the rate at which one country’s currency used to trade for
another country’s currency. There are two impacts of exchange rate on the economy. Firstly, the
appreciation of Malaysia Ringgit (RM) would cause a strong exchange rate, and thus cause
several problems for Malaysia. One of the significant problem is the decrease in net exports. An
appreciate in RM would hurts its exporter by making the price of imports become cheaper and
export become more expensive. Hence, the performance of stock market in an export-dominant
country could be negatively affected as an appreciation in RM would lead to an net increase in
share market index (Tian et.al, 2010). The next significant impact of exchange rate is the
depreciation of RM that cause the weak exchange rate. In this situation, imports will be more
expensive and exports will be cheaper. Hence, this would positively affect stock market in an
export-dominant country as the depreciation in RM would cause an net decrease in share market
index (Tian et.al, 2010).

Exchange rate would especially affect performance of consumer cyclicals industry significantly.
Consumer cyclicals is a type of stock that depends laboriously on the business cycle and
economic conditions. It include industry such as automotive, housing, retail, construction and
entertainments. In Malaysia, the economy is experiencing the appreciation in RM against the US
dollar in 2017 (Dass, A. , 2018). This situation will weaken Malaysia economy, where foreigner
would reduce their spending on consumer cyclical industry in Malaysia, which will diminish the
quantity of exports, and domestic residents would increase their spending on US products, which
will increase the quantity of imports. In addition, domestic consumers have less discretionary
income to spend on consumer cyclicals industry with the price pressure. Hence, consumer
cyclicals industry will confront the humble sales and earning, which will lead to the
underperform on their stock price.

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1.2 INTEREST RATE - FINANCIAL INDUSTRY

The second external factor the could influence Malaysia stock market significantly is interest
rate. Interest rate is a transaction cost incurred when consumers are doing borrowing or saving. If
the consumers are borrowing, the interest rate will incur as cost of borrowing, as interest rate is
the extra amount of cost lender needs to pay it back to the borrower. If consumers are saving, the
interest rate will then incur as a an income. According to news released by central bank Malaysia
at May 2018, the benchmark interest rate will be held at a high level of 3.25%.

Figure 2 : Malaysia Benchmark Interest Rate in 10 Years


Source : Trading Economics | Central Bank of Malaysia

In the situation that the interest rate increases, it will simultaneously increase the cost of
borrowing and the interest income earned from saving money in the bank. People in the market
will eventually decrease the borrowing for investing to avoid extra cost incurred, and increase
saving rate to take advantage of the higher interest. It will affect the stock market in a negative
way, as lesser people are investing (Rigobon and Sack, 2003).
However, there are industries that might become the safe haven industries. Financial industry is a
category of the financial based corporates that provide financial services to retail, commercial or
individual customers. This industry is an inclusive of bank, insurance company, investment
company and real estate company. The main income for financial industry is generated from

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interest paid by the consumers. Besides, increasing of saving will also increase the capitalized
amount within financial industry`s company, as the money is to be saved into them (Rodak,
2006). These two factors make financial industry might have a relatively stronger stock
performance than other industry, especially for those solid, good reputation corporate such as
CIMB, MayBank or Alliance Bank. Since financial industry is potentially able to outperform
other industry, investor would invest into financial industry, in the case of increasing in interest
rate.

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1.3 MEDICAL COST INFLATION - HEALTHCARE INDUSTRY

Medical cost inflation, which is the annual percentage increase in price of healthcare, is
identified as the factor that will affect healthcare industry the most in Malaysia.

Figure 3. Overview of IHH Healthcare Bhd revenue composition


Source: IHH Healthcare webpage

As seen on Figure 3, although Malaysia has the highest number of inpatient admissions, the
average revenue per patient is the lowest at only RM5,915 among other countries that IHH
Healthcare Bhd has ventured into. This has shown that private healthcare cost in Malaysia is
relatively cheap. In order for companies in Malaysia’s healthcare industry to gain higher
revenue, the price for healthcare must increase.

According to Wong (2017), Malaysia’s healthcare inflation stood at 11.5% in 2016 and is
projected to rise to 12.7% in 2017. The reason for such high medical inflation rate is due to both
demand-pull and cost-push inflation. Demand-pull inflation arise when the aggregate demand for
healthcare outpaces the aggregate supply. The growing demand for healthcare is due to lifestyle

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choices such as poor eating habit and smoking, as well as the increase in number of aging
population. Whereas cost-push inflation is caused by increase cost of factors of production. The
advancement of medical technology has tremendously increased the price of medical
equipments.

Although there exists a steady increase in price in private healthcare and having public hospitals
as a perfect substitute, the demand for private healthcare will remain high as more people now
have medical insurance and can afford the medical fees. Therefore in the long-run, increase in
price level in healthcare industry will increase profits.

(Word count: 1032 excluding captions, in-text citation, figures, references and headings)

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2.0 INDICATOR ANALYSIS WITHIN EACH INDUSTRY

In order to form a portfolio, a decent quality of analysis on the stock must be carried out. The
indicators that will be used in our analysis are P/E Ratio, 5 Years EPS Growth and Dividend
Yield.

2.1 INDICATORS CHOSEN


P/E Ratio is referring to the Price Earning It is a ratio that allows investor to value how a firm`s
share price is related to its earning per-share. The calculation of P/E Ratio is as such :

P/E Ratio = Price per Share/Earning per Share

It basically tells us that the willingness and expected amount of the investor to invest in order to
get a return of one dollar of company's earning. If a firm is currently listing on the market with a
P/E Ratio of 15, it means that investor would pay $15 for $1 of current earnings. In general, it
says that a lower level of P/E indicates that either the stock is undervalued (low in numerator,
price per share) or doing extraordinary well in recent quarter (high in dominator, Earning per
share) (Seetharama and Rudolph, 2011).

The second indicator that will be used in this portfolio analysis will be 5-years EPS Growth. It is
an indicator that shows the growth of earning per share of a particular firm in the past 5 years.
The calculation of 5 years EPS(Earning per Share) Growth is as such :

(EPS this year / EPS 5 years ago) ^ (5/1) – 1

If a firm has got a 5 years EPS Growth of 20%, it means that the firm’s earning per share has
grown 20%, compared to 5 years ago. In general, it is said that the the higher the growth rate, the
better the stock could perform in the future, as it shows that the firm is capable in continuously
growing its earning per share, which benefics their shareholder a lot in the long run (Lam, 2002).

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The third indicator that will be used in this portfolio is Dividend Yield. Dividend yield interprets
how much dividends are paid by the firm each year and how it relative to its value (price per
share). The calculation of Dividend Yield is as such :

Dividend Yield =Annual Dividend per Share / Price per Share

If a firm has a 5% of Dividend Yield, it tells us that the company is issuing 5% of it share price
as dividend to its shareholder. There is no fixed method to judge whether it is good to issue more
or less amount of dividend. Most of the time, the amount of dividend is either decided by the
firm’s industry or the firm’s business objective. If the firm is in the information technology,
medical care or any other industry that needs a continuously of advancement in term of
technology or operating method, the lower the dividend is given, the more it can attract the
investor as most of the cash flow is being used into reinvest or starting new project, which is the
key for such industries to survive in the long run. If the company belongs to financial industry,
investor who invested the firm would expect a relatively high dividend as it is a solid prove of
strong cash flow hold by the firm, which is the key for a firm to sustain in financial industry
(Harshapriya, 2016).

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2.2 COMPANY COMPARISON AND CHOOSING WITHIN EACH INDUSTRY
2.2.1 CONSUMER CYCLICAL INDUSTRY

Cashtag Name Average Price Market P/E Dividend Growth of


Rating capabilities yield EPS in 5
years (%)

$AIRA AIRASIA 9 3.21 10727.74 7.02 5.2% 11.68


GROUP

$HUIN Hume 2 1.480 709.06 83.01 1.34% 6.56


industry

$AMWA Amway 6 7.650 1257.55 25.06 2.56 -11.99


Malaysia

Table 1: Three Ratios of $AIRA, $HUIN, $AMWA.

In consumer cyclical industry, the three chosen companies are Airasia Group, Hume industry and
Amway Malaysia. For price earning ratio (P/E), Airasia group has the lower ratio (7.02)
compared to Hume industry (83.01) and Amway Malaysia (25.06). This low P/E ratio generally
indicate the company is mature, stable and have moderate growth potential. Beside, Airasia
group gain the highest dividend yield rate(5.2). Investors often seek for high dividend yield as it
determined the performance of the company. The high dividend yield will attract investors as
they can gained higher return if the value of their holding stock increases during the period.
Furthermore, the growth of earning per share (EPS) on Airasia group in 5 years (11.68) is greater
than Hume Industry (6.56) and Amway Malaysia (-11.99). Stocks with higher EPS growth rate
generally is an attractive alternative to investors, at which high EPS growth rates have a tendency
to more stable growth rate over the long term. Hence, Airasia group is a selected company to
purchase on Bursa Market place as it has low P/E ratio, high dividend yield as well as growth of
EPS in 5 years.

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2.2.2 FINANCIAL INDUSTRY

Cashtag Name Average Price Market P/E Dividend Growth of EPS in


rating capitalization yield (%) 5 years (%)

$ALLI ALLIANCE 8 4.260 6594.93 13.11 3.76% 0.37%


BANK

$APES APEX EQ 4 1.020 217.84 14.87 1.94% -11.65%


HLD

$DAIM DAIMAN 9 2.080 441.36 14.06 2.64% -9.38%


DEV BHD

Table 2: Three ratios of $ALLI, $APES, $DAIM.

The three companies being chosen for comparison are Alliance Bank, Apex Equity Holding and
Daiman Development Berhad. Alliance Bank has a lower P.E. Ratio (13.11) than APES (14.87)
and DAIM (14.06), which indicates that Alliance Bank is either an undervalued stock or doing
extremely well in term of earning per share in recent quarters. Alliance Bank also has got a
greater growth of Earning per Share in 5 years (0.37% > -11.65% and -9.38%), which indicates
that Alliance Bank is currently in a trend of growing its earning per share, a positive sign that the
firm is operating in a right path. Furthermore, Alliance Bank also perform better with a higher
dividend yield rate (3.76%) than the other two companies (1.94% and 2.64%) , based on the
theory mentioned in section 2.1, a higher amount of dividend yield rate is considered outstanding
within financial industry, as it is a sign of having a solid cash flow. Therefore, Alliance Bank has
a better position than other two companies to be included in the portfolio.

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2.2.3 HEALTHCARE INDUSTRY

Cashtag Name Average Price Market P/E Dividend Growth of EPS in


rating capitalization yield (%) 5 years (%)

$IHHH IHH 7 6.26 49455.95 99.16 0.50% 1.2%


HEALTHC
ARE

$HTHB HARTALE 4 6.08 20143.05 46.29 1.15% 10.71%


GA HLDGS

$TPGC TOP 7 10.28 13077.86 17.76 2.65% 18.04%


GLOVE
CORP

Table 3: Three ratios of $IHHH, $HTHB, $TPGC.

In healthcare industry, IHH Healthcare, Hartalega Holdings and Top Glove Corp are chosen to
be analysed. IHH Healthcare has a relatively large market capitalization of RM49455.95 million,
which made it the most preferable stock. This signifies that IHH Healthcare has more assets,
capital and higher revenues than Hartalega Holdings and Top Glove Corp. Besides, stock price
of IHH Healthcare will tend to be less volatile than the other two companies. However, due to its
large size, IHH Healthcare will have a lower growth potential compared with HTHB and TPGC,
which justifies IHH’s lower growth of EPS in 5 years at only 1.2%. Another reason for IHH’s
low growth of EPS is due to high number of outstanding shares. The dividend yield of 0.5%
indicates that instead of paying out a large portion of IHH’s annual profits as dividends, the
earnings in the company have been retained for future growth. IHH is currently expanding into
multiple countries including China, Bulgaria and India, therefore a larger dividend payments can
be expected in the future. The stability of IHH stock and potential long-run benefits will seem
attractive to many long-term investors.

(Word count: 1058 excluding captions, in-text citation, figures, references and headings)

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2.3 PORTFOLIO COMPOSITION

Figure 4. Portfolio composition- shares allocation mix of ALLI, AIRA and IHHH

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3.0 CONCLUSION

3.1 JUSTIFICATION OF PERFORMANCE

Figure 5: Stock Performance of Three Selected Companies.(21th May to 25th May )


Source: Bursa Market Place

Due on 25th May, the portfolio has got a 0.97% (RM478.00) of profit. However, the profit stated
in the picture did not include commision cost.

Profit/Loss = (buying share price*share quantity) - (selling share price*share quantity) -


commision cost
= Gain/loss - buy-in commision - sell out commision

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$AIRA = -120 - (13000*0.5%) - (12880*0.5%)
= -120 - 65 - 64.4
= -$249.4
$ALLI = 180 - (12900*0.5%) - (13080*0.5%)
= -180 - 64.5 - 65.4
= $50.1
$IHHH= 418 - (23370*0.5%) - (23788*0.5%)
= 418 - 116.85 - 118.94
= $182.21
Overall= -$249.4 + $50.1 + $182.21
= -$17.09
After taking transaction cost into account, it shows that this portfolio has a loss of $17.09. This
loss might mainly being caused by the decoding of 1MDB`s document and national debt by Tun
Mahathir and Ministry of Finance in Malaysia at last week.

Figure 6: KLSE stock movement from 21th May to 30th May


Source: Yahoo finance

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As per the figure above, it shows that Malaysia stock market collapsed upon the announcement
made by Tun Maharthir (Channel 8 News, 2018). This announcement indicates that Malaysia is
suffering an enormous amount of debt, which affect the government's capability in developing
the country and managing its basic finance. This is a kind of systematic risk and factor that is
undiversifiable despite of industry. However, Alliance Bank and IHH Health Care still manage
to capture profit in this downturn of economic. The reason behind it could be what was
mentioned before, safe haven industry (stock). When the stock market is in a downturn, all the
money in the stock market will be withdrawn and transfer into bank, which make bank becomes
an alternative way to keep excess money, eventually make investor have faith in bank sector. For
IHH Health Care, it is belong to healthcare industry, a necessary thing for the whole population.
Hence, when market is in a downturn, logical investor would imply Healthcare industry as the
stock the will be hold by the government. However, these safe haven theories only applicable
for a short amount of time. If the market ended up into big recession such as Big Recession in
year 2007, bank sector will not able to exclude itself from collapsing as well. As a conclusion,
we would say that this portfolio is an average portfolio, as it does capture some revenues,
however, got dragged down by the market downturn, ended up with a loss of $17.09.

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3.2 RECOMMENDATIONS

In order to further improve the performance of this portfolio, there are several strategy need to be
implemented in the study, such as asset allocation strategy and tax management.
Asset allocation strategy is the most significant variables to increase the portfolio performance.
According to Bodie et al (2011), asset allocation refer to the decision between broad asset
classes. It means the number of percentage to allocate in a variety of investment categories, such
as stocks and bonds that depends on the investor’s financial situation, risk tolerance and time
horizon. There are several advantage of an asset allocation strategy, where one of them is
providing a discipline approach to diversification. Hence, owning several investments will
mitigate the portfolio risk by providing protection, as different economic and market variable
will affect different type of investments.
The next method to improve portfolio performance is tax management. Tax actually has a
significant effect in a portfolio and hence should be carefully managed. There are three
categories in tax management; tax-loss harvesting, asset allocation and withdrawal strategy in
retirement, where only tax-loss harvesting will be discussed in this study. Tax-loss harvesting
generates more tax savings to manage investment. This would benefit investors as they can
generate tax deduction by selling at a loss in the situation of a decrease in investments.
Therefore, this study can further improve performance of the portfolio by adopting asset
allocation strategy and tax management. Both methods would assist to maximise profit and
minimise losses or volatility in the portfolio.

(Word count: 560 excluding captions, in-text citation, figures, references and headings)

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4. REFERENCE LIST

Bodie, Z., Kane, A. and Marcus, A.J., 2011. Investment and portfolio management. McGraw-
Hill Irwin.

Channel 8 News. (2018). Tun M:Malaysia National Debt hits 1 trilliion. [online] Available at:
https://www.channel8news.sg/news8/world/20180521-wld-malaysia-debt/4032990.html
[Accessed 30 May 2018].

Dass, A. (2018). Ringgit strengthening and US$ weakening. Available:


https://www.thestar.com.my/business/business-news/2018/02/05/us-dollar-weakening-and-
ringgit-strengthening/. Last accessed 27th May 2018.

Harshapriya, W. (2016). The Impact of Dividend Policy on Share Price Volatility: Evidence
from Banking Stocks in Colombo Stock Exchange. Staff Studies, 46(1-2), p.27

Lam, K. (2002). The relationship between size, book-to-market equity ratio, earnings-price ratio,
and return for the Hong Kong stock market. Global Finance Journal, 13(2), pp.163-179.

Murthy, U., Anthony, P. and Vighnesvaran, R., 2016. Factors Affecting Kuala Lumpur
Composite Index (KLCI) Stock Market Return in Malaysia. International Journal of Business
and Management, 12(1), p.122.

Rahman, A.A., Sidek, N.Z.M. and Tafri, F.H., 2009. Macroeconomic determinants of Malaysian
stock market. African Journal of Business Management, 3(3), p.95.

Rigobon,R. And Sack, B. (2003). Measuring The Reaction of Monetary Policy to the Stock
Market. The Quarterly Journal of Economics, 118(2), pp.639-669

Rodak, M. (2006). It’s about Time: A Systems Thinking Analysis of the Litigation Finance
Industry and Its Effect on Settlement. University of Pennsylvania Law Review, 155(2), p.503.

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Seetharama, A. and Rudolph Ra, J. (2011). An Empirical Study on the Impact of Earnings per
Share on Stock Prices of a Listed Bank in Malaysia. The International Journal of Applied
Economics and Finance, 5(2), pp.114-126.

Tian, G.G. and Ma, S., 2010. The relationship between stock returns and the foreign exchange
rate: the ARDL approach. Journal of the Asia Pacific economy, 15(4), pp.490-508.

Ullah, G.M.W., Islam, A., Alam, M.S. and Khan, M.K., 2017. Effect of Macroeconomic
Variables on Stock Market Performance of SAARC Countries. Asian Economic and Financial
Review, 7(8), p.770.

Wong, E,. L. (2017) Malaysia’s medical inflation at double-digit pace. The Edge Financial
Daily. Available at: http://www.theedgemarkets.com/article/malaysias-medical-inflation-
doubledigit-pace. [Accessed 30 May 2018].

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5. APPENDICES

Screenshot of The Edge Financial Daily online newspaper on August 17, 2017

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The table below shows percentage increase of some common medical procedure costs in every 5
years

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Stock Performance of Three Selected Companies.(21th May to 25th May )

Transaction Record for the three selected stocks

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