Financial Times

Investing wisely in the stock market

In an increasingly turbulent financial world, it is wise to know that there are always winners - provided they make smart investments, says the Colombo Stock Exchange (CSE).

"Although stock markets may experience short-term fluctuations, in the longer term they can be considered an attractive investment. Investors who consistently put money into stock markets as a way of accruing longer term gains typically end up with gains that are significantly above other financial instruments with similar risk profiles," the exchange said in a promotional statement explaining the advantages of investing in stocks.

Here are extracts of the statement:

There is no such thing as a risk free investment. For banks, risk is often managed to such a degree that it becomes a negligible factor. However, investment instruments such as saving accounts or fixed deposits have fundamental flaws so that they become obstacles to effective long-term investment. One such obstacle is created when an economy's inflation rates are higher than or on par with the interest rates on offer. So savings and fixed deposits cease to become effective investment tools as the money invested now could have the same, or even less, purchasing parity in a few years. Therefore, gaining interest from such instruments on invested capital could sometimes lead to losing value. In Sri Lanka, for example, the most recent inflation rate is approximately 10 percent while the most customer-oriented offer from such instruments offer approximately 8 percent interest earnings to savings account holders and 10 percent to fixed deposits.

Shares are admittedly riskier but in the longer-term that risk stabilizes to a marginal degree, which can be minimized, if the risk is managed. The advantages of stock markets such as versatility, profitability and liquidity are very attractive to most corporate investors.

Smaller investors can also access these advantages if they take the added steps outlined below:

An important element of sensible investment is to know the market. This aspect is the best advice because currently most small investors make investments based on speculative insight. There are better ways to go about it. Even if investors give their capital to investment professionals, they should know how to track investments and veto the choices of some of their investment advisors. A knowing-the-market attitude is primarily advantageous when it comes to picking stocks to build a diversified portfolio since forewarned means investors are prepared and can cut risk and optimise growth.

There are certain tools that can help to determine the quality of a share and a company. These should be ideally the first steps in gathering the right information to formulate and implement stock buying decisions.

Earnings Per Share (EPS)- calculated by earnings divided by total number of shares so gains can be judged at an individual share level. It is calculated by net profit after tax less preference share dividends less interest, the total of which is then divided by time weighted average number of ordinary shares in issue and ranking for dividends. What an investor can learn from this is that the higher the EPS, the more value the ordinary share is accruing. For example if a company has an EPS of Rs. 10.00, and it is compared to an industry benchmark of Rs. 8.00 then the value of the share is good. This suggests the share in question is doing much better than industry standards.

Return On Equity - indicates the rate of return earned on the amount invested by the shareholders. It is calculated by the earnings available to ordinary shareholders divided by total shareholders equity (equity portion of the balance sheet).

Price to Earnings - this ratio is used to assess the amount that investors are willing to pay for each monetary unit of earnings. It is calculated by dividing the market price per share divided by earnings per share.

The message given to an investor is that higher the ratio, the more the likelihood of earnings in the future or the share is less risky in nature. Therefore investors may be willing to pay a larger multiple of its earnings at that point in time because they anticipate it is very likely to be a good investment. The ratio may be higher because it is poised in a potential of bed of activity like in a sector such as technology stocks.

Dividend Payout Ratio - this is used to find out the percentage of profit that is paid out as dividends. It is calculated by dividing the Dividends Per Share by Earnings Per Share (dividends per share is calculated by taking the total dividends divided by the total ordinary shares in issue and ranking for dividends).

Another form of reducing the risk factor is using a diversified portfolio each from varying sectors such as banks, manufacturing, hotels, plantations, etc. It is also essential that they be at different risk levels ranging from low risk-low return to high risk-high-return. It is also a good idea to consider at least as part of your portfolio companies that have submitted themselves for a credit rating.

It is also sound business sense to look through each company's books looking for strengths and weaknesses as well as analysing its books with several key financial ratios such as the Cash Ratio and Inventory to Net Working Capital or other Liquidity Ratios. Other sets of ratios can also be of immense value in analysing companies, ratios such as activity and leverage ratios indicate how companies leverage debt and how often turnover is recycled. It is also important that cash flows/liquidity be checked often because it is the heart of any business.

Company culture and values should be considered and even marketing plans and financial plans if accessible with questions such as 'how much a company reinvests from retained earnings so as to grow' and 'is reinvestment being planned on being planned for?' should be focused on by potential investors.

Sound investment advice from reputed and accredited financial and investment analysts and stockbrokers of member firms of the stock exchange. These professionals can advise newcomers about the available shares, investment options and are knowledgeable in building the ideal diversified portfolio [mix of instruments such as shares and fixed income instruments] for an individual investor.

Unit fund managers may be another option to investing in the stock exchange, and this option is also the best for investors who only have minimal investment capital. Unit trusts are funds in which an investor buys units and this unit increases and decreases depending on the fund value and gives dividends like in shares.

The only difference is that unit trusts consists of funds which have a diversified portfolio of investment instruments which is overseen by experienced managers.

Investors are even given the choice of security and profitability in their investments, and there are funds with low risk-low growth and high risk-high growth options.

Airline passengers sprayed for bugs

An airline flight to the tropics may involve greater health risks than a dose of airline food--pesticides are routinely sprayed in aircraft cabins by U.S. airlines sometimes over the heads of passengers during flight.

"Disinsection" is the industry term for this practice, which continues despite clear evidence of risk to passengers and crew. People more vulnerable to the effects of pesticides, such as infants, pregnant woman or asthmatics are informed, if at all, only just prior to spraying. Airline flight attendants, unions argue that chemical spraying is unnecessary because mechanical methods could be applied instead.

No U.S. agency requires pesticide use on planes. The US Department of Transportation website lists the countries that require in-flight spraying, and those that will accept the "residual" treatment as an alternative. Six countries currently require pesticide spraying on all inbound flights:

Grenada, India, Kiribati, Madagascar, Trinidad and Tobago and Uruguay. The application method varies by country and airline. Typically, a pressurized spray containing 2% phenothrin is sprayed over the passengers' heads during the flight (also called "top-of-descent") or upon arrival, but while the doors are closed. Alternatively, cabin crew may spray the occupied cabin prior to departure after the doors have been closed ("blocks away"). A member of the crew will announce the procedure shortly before they spray. Another six countries: Australia, Barbados, Fiji, Jamaica, New Zealand andPanama require the use of residual pesticides. In this case applicators board the aircraft and spray every surface in the cabin with a solution thatcontains 2% permethrin. This process takes place shortly before crew and passengers board, without their knowledge. Babies and children are said to be more sensitive to the effects of permethrin. Once an aircraft has been residually treated, foreign quarantine officials will allow it to land without additional pesticide treatment for the next 56 days.

Passengers flying on US domestic flights may find themselves on an airliner that has recently been sprayed. United Airlines, for example, treats all of its 747-400 aircraft in Hong Kong. These aircraft are not restricted to the South Pacific routes; they are simply scheduled to fly to

Australia or New Zealand during the next 56 days, but in the meantime, can be flown on both international and domestic routes.

The International Civil Aviation Organization reports that most airlines use permethrin and pyrethroid, both are suspected endocrine disruptors, and permethrin may be a carcinogen. The Northwest Coalition for Alternatives to Pesticides (NCAP) points out that pesticides cause even greater harm on airplanes, where up to 50% of the air in the cabins is recycled. "Pesticidesbreak down slowly in the enclosed, poorly ventilated aircraft," says a NCAP spokesperson.

The airlines are not required to inform passengers at ticket purchase of flight sprays, and there is also no control over how much pesticide is applied on the aircraft. The Association of Flight Attendants reported in 2001 that one airline used 50-60% more pesticide than the maximum recommended by the World Health Organization. Between 2000 and 2001, one cabin crew union received complaints of pesticide-related illness on more than 200 flights. Many complaints cite damp surfaces and pesticide odors in crew rest compartments.

Crews and passengers have reported sinus problems, swollen and itchy eyes, cough, difficulty breathing, hoarseness, skin rashes/hives that vary in intensity, severe headaches and fatigue, and heightened sensitivity to other chemicals. Some crewmembers have medical documentation of reactions consistent with nerve gas exposure, such as blood, optic nerve, and nervous system abnormalities.

Alternative methods to control insects on aircraft are already in use.

Since the 1980s, the U.S. Department of Agriculture (USDA) has used curtainsmade of overlapping strips of plastic to successfully keep Japanese Beetles off aircraft destined for the western states during the summer. Chemically treated mosquito netting and blowers in jetways may also be used as alternatives. A variety of mechanical means should be tested.

The Association of Flight Attendants suggests that passengers contact the airline to find out if pesticides will be sprayed on their flight, or if they will be boarding a "residually sprayed" craft.

( US Pesticide Action Network Updates Service)

Singapore struggles through economic crisis

Its unemployment rate is alarmingly high. Its new budget didn't do enough to spur growth, some moan. And there's gloom about the ability of this once fierce Asian tiger to claw its way back to good growth rates.

No, this isn't Hong Kong. It's Singapore, which like its long-time rival is grappling with an array of economic challenges with limited resources. Though some Singapore developers are making money in China's real estate market, Singapore can't rely on a vast Chinese hinterland for future markets and growth. Instead it is seeking to reinvent itself by acquiring new skills, in areas like life sciences, finding new export markets and broadening exports beyond electronics to other products, most notably pharmaceuticals.

In Singapore, decades of strong fiscal conservatism produced billions of dollars of surpluses, giving it plenty of cash. But to grow when waves of investment keep flowing to China, Singapore needs much more of what Hong Kong has in ample supply: entrepreneurial flash and investor buzz-the kind that comes from being a gateway to China.

Singapore's strong financial position gives it the option to spend and run bigger deficits during tough times. But Singapore is more concerned about staying competitive and dealing with long-term structural problems than about a cyclical downturn. "We must find new sources of growth or else stagnate and decline, "Deputy Prime Minister and Finance Minister Lee Hsien Long said on February 28 when presenting the budget for the year beginning April 1.

Some businessmen and analysts think the planned budget deficit-less than 1% of GDP-is too small, and are disappointed Singapore didn't cut income taxes (Personal and corporate taxes were cut to 22% in 2002, and the government says they will be cut to 20% by 2005.) Others differ, saying the government can easily boost spending later if global economic conditions are worsened, for example, by a messy war in Iraq.

But Singapore's pragmatic approach to attracting foreign investment won't change. One day before the budget speech, the government announced a scheme to let foreign computer technicians arrive and work immediately without the hassle of red tape that expatriates might find elsewhere in Asia. The move opened the way for India's Satyam Computer services to choose Singapore for its disaster centre to protect clients against information system breakdowns.

The city-state's bid to build biotechnology into big business "appears to be coming along well," says Singapore Confederation of Industries economist Tan Kee Wee. The government valued biotechnology production last year at S$9.7 billion ($5.6 billion), a 48% rise from 2001.

Changing mindsets will come much more slowly than altering policy. Overall, the government's big role in the economy still "doesn't leave much room for spontaneous entrepreneurial activity" says Manu Bhaskaran, an economist with the Washington-based Centennial Group. But job cuts, like the 800 recently by port operator PSA Corp., may force more Singaporeans to get more entrepreneurial Prime Minister Goh Chok Tong last week praised a 34 -year-old graduate of United States university for her ability to reinvent herself. Her new job? She sells roasted chestnuts on the street.
( Far Eastern Economic Review)

SLSI offers training for ISO re-certification

The Sri Lanka Standards Institution (SLSI) has organised a Consultant Development Programme to meet the needs of organisations seeking to implement Quality Management Systems conforming to requirements stipulated in the new International Standards ISO 9001:2000.

All organizations having their Quality Management Systems certified as per ISO 9000:1994 system have to transform their documentation to suit the new standard by December 15.

"It is felt that there would be a heavy demand for re-certification in the near future," an SLSI statement said.

A key advance in the 2000 version is that the implied requirement for a totally documented system is no longer present.

The emphasis on performance improvement and the adoption of the process approach make the business realize that the new model will add value to the organization enhancing its competitive edge while improving efficiency and effectiveness.

With the ISO 9001:2000, the focus has shifted from conformity to performance, the SLSI said. Therefore, it will be necessary for all organizations to give their staff comprehensive training on the new requirements of the ISO 9001 standard and action that has to be taken for the transition of the Quality Management Systems from the 1994 version to the 2000 version.

A recent analysis of the financial performance data of ISO 9000 certified companies in three US business sectors over a 10-year period, which compared them with that of control groups of non-certified firms in the same sectors, has revealed that firms that failed to seek certification experienced substantial deterioration on return on assets, productivity and sales.

Is Australia's economic miracle sustainable?

To a visitor from the northern hemisphere, Australia is like another planet. Not only does the sun shine there much more at this time of the year but even as the economies of America. Europe and Japan appear to be stumbling for the second time in less than three years, Australia continues to boom. The country is now in its 12th year of uninterrupted economic expansion, having shrugged off both the East Asian crisis of 1997-98 and the global downturn in 2001. Australia's GDP grew at an annual rate of 3.0% in the year to the fourth quarter of 2002. During the past decade it has chalked up annual average growth of almost 4%, the faster pace of any big, rich country. Nor surprisingly, the OECD this week declared the Australian economy to be one of the rich world's best performers.

In part this success is down to sound monetary and fiscal policies, and to structural reforms that have both raised productivity growth and made the economy better able to adjust to shocks. Productivity growth has averaged 2.7% over the past decade, up from 1.6% in the 1980s and well ahead of America's much-acclaimed annual increase of 2.2%. The structural reforms of the past two decades have included a shift from centralised wage fixing to local enterprise bargaining, the introduction of more flexible work practices, the lowering of trade barriers, and the deregulation of product markets and the financial system. But Australia has also enjoyed some good luck. A sharp fall in its currency made producers highly competitive, and, because it has a relatively "old economy" with a small IT sector, it avoided the excesses of the tech bubble. Will its luck hold?

A severe drought cut farm output by 15% in the fourth quarter of last year, but the rest of the economy remains strong. Business investment rose by 19% last year, after several years of weakness and surveys suggest that it should remain robust in 2003. Strong demand in East Asia, especially China, will also benefit Australia: the region accounts for almost 30% of its exports. Forecasters still expect growth to top 3% this year and next. Even though this is less than the estimated potential growth rate of 3.75%, it is still a figure that Germany or Japan can only dream of. There are, however, three big risks on the horizon that could further dent growth: a global recession, a sharp surge in the Australian dollar and a collapse in house price.

A lengthy war with Iraq and rising oil prices would increase the risk of a sharp slowdown, if not a recession, in America and Europe. On top of this, the Australian dollar has risen by more than 20% against the American dollar since 2001. Its gain in trade-weighted terms has been more modest, and it remains the most undervalued rich-country currency, according to both The Economist's Big Mac index and more sophisticated gauges. This undervaluation combined with Australia's outstanding economic performance, may attract large capital inflows and keep pushing the currency up, hurting exports and profits. The currency could even overshoot, and become overvalued.

The biggest worry of all is that the house-price "bubble" could burst. Average house prices have jumped by more than one-third over the past two years, to record levels relative to incomes. Many economists argue that this is justified by lower interest rates, and they expect prices to continue rising, if more slowly. But there are clear danger signals, notably the large number of people buying houses in the expectation of big capital gains. Those buying properties to let, rather than to live in, accounted for more than 40% of all new mortgages approved last year. In the big cities a glut of rental properties has caused an increase in vacancy rates; rents have started to fall. Shane Oliver, chief economist at AMP Henderson, an investment firm, predicts that average house prices will fall by 10-15% over the next two years: but he expects the impact of this on GDP growth to be offset by strong business investment.

The real worry is not house prices, but the mortgage debts incurred by buyers, Australian household debts has jumped from 85% of personal disposable income in 1996 to an estimated 127% by the end of last year - a higher burden even than in the United States. Home-equity withdrawal (borrowing against the rising value of homes, over and above net new purchases) is running at a record 6% of disposable income. Goldman Sachs estimates that household debt service is at record levels in relation to disposable income, despite low interest rates.

Goldman Sachs has calculated an index of "consumer vulnerability" for 28 economies. This takes account of the level and rate of growth in household debt, the trend in the household saving rate (Australia's has fallen from 4% to an estimated 1% in the past two years), unemployment and the growth in real income. Australian consumers are the most vulnerable on the list. Their excessive debts and a bursting of the housing bubble may not cause a recession by themselves, but they could certainly exacerbate a downturn caused, say, by a global recession.

Nevertheless, most Australian economists remain cheery, expecting the expansion to continue. Indeed, the mood is a bit similar to that in America in 2000, just before its bubble burst. Australians retort that their situation is completely different: America's economic imbalances were much bigger and more widespread than Australia's today. It is true that Australia has not had a stock market bubble, and it has also escaped over-investment and over-borrowing by firms.

On the other hand, Australia, unlike America at the end of the 1990s, has a house-price bubble, which could be much more dangerous than a share price bubble if it bursts. Then there are Australian consumers' debts. Australia's current-account deficit (4.4% of GDP last year) is also almost as big as America's.

Australia, just like America in the late 1990s has enjoyed real productivity gains in recent years.

However, there is always a risk that during a boom investors and borrowers can get carried away. Australia's housing market could be as much a victim of irrational exuberance as America's stock market has been.
(Economist)

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