PART 1

One question that cross my mind whether our Bursa Market Cap has outrun Malaysia GDP?

The following concept or ratio is a very limited way to measure about the concern above, of course, there are many other more comprehensive measurements which I may discuss later.

                                    GDP (US$)      Market Cap (US$)

1992                                                         98b

mid 92                                                   170b (assumed)

1993                           66.9b                 247b

2014                           238.4b              516b

CAGR (93-14) - US$    6.0%              3.5%

CAGR (92-14) - US$                           8.0%

CAGR mid92-14 - US$                      5.67%

CAGR mid92-14 - RM    5.0%           6.8% (mid92 in RM)

Conclusion:

Using mid 92 to 2013 in RM is the best comparison (in red), hence, we have GDP vs MCap = 5.0% vs 6.8% (last 21 years).  The Market cap growed faster than its GDP. [ However if you use US$, the GDP growth is actually is about 6.0% vs 5.67% market cap increase from mid 1992]

(to be continued)

PART 2

From the perspective of Market Cap over GDP (Using USD except in 2013)

1992                              98/63         156%

1993                             247/67        368%

Average 1992/3         170/65        260%

2013                          1700/787      216%

2005-2012                                       86% to 172%

Conclusion:

Using MCap over GDP ratio, the latest 2013 shows that it is about 216% vs the average of last 8 years from 86% to 172%.

PART 3

Another method is using MEAN PE of the MCap.  Low is 12x, Mid  is 15x, and High is 18x.  Today is about 17x, we are leaning towards the high side.

Conclusion

PE wise, we are on the high side but not at the extreme.

PART 4

Based on Part 1, 2 and 3 comparison within Malaysia only.  No comparison is made with Singapore, Korea, Thailand, Indonesia, as the structure of GDP and dynamic of the MCap of our neighbour countries is very much different.  In a nutshell, the market cap is on the high side, but not that extreme like PE of 25 to 30x. BUT the LIQUIDITY of Bursa is high up to now, so, this may go on for a while.

However, there are many other VARIABLES that effect Bursa, such as EPF investment in Equity, has increase from about 25% to 43% over the last 10 years ago.  There is also PNB,  LTAT, Tabung Haji, Unit Trust which play a big role in our Market Cap.

As we know, share market is a mix of science and art.  Art, because emotions or psychology is involved, science is because, you can also measured them using the financial ratios.

PART 5

One of the best time tested technique of successful investment for long term is ALWAYS buy shares with growth potential in earnings and is undervalued (compare with its peers and have some competitive advantage).  If the market goes to PE of 20x and above, it is time to REDUCE drastically your holding.  Or there is a major DOWNTURN in financial institutions (30% of Market Cap), then we should consider to REDUCE your investment.  iCap has a 50%:50% cash and invested allocation since 2013.  I believe the correction will come from NYSE or Europe markets.  But, it is impossible to know when will it happen.

PART 6

INFLATION

The official inflation rate is 3.5%.  The actual real inflation is between 6-8%.  Similarly the CAGR for Property, is about 6-8% as well, for long term.  

PROPERTY

So, in reality, our purchasing power is HALFed every 10 years.  This is really the INVISIBLE financial time bomb many are not protected from.  If you buy a house in say PJ, SS2, say for RM300k in 1994, 20 years later today, it is worth about RM900k.  The actual compounding rate is actually about 7.2%, or double every 10 years.  So, your property just barely keeping up with inflation.  Of course there are some a lot higher than 7%, but over a long run like 20-30 years, 7% - 8% is a a fair rate to use.

SALARY

In 1994, an accounting firm (pwc) paid about RM1500 for fresh graduates.  Today, 20 years later, they are paying only double, RM3,000.  In reality, the compounding growth is only about 3.6% p.a.  So, in 1994, it take 16 years to own a house in SS2, today, 2014, it takes about 24 years to own a house.

EDUCATION (TERTIARY)

Similarly another big ticket item for parents is the education expenses overseas (tertiary), growth about 6-8% p.a. It may even be higher than 6-8% taking into account currency differences today.  1994 Australia fee for bachelor of commerce (finance), it cost about AUD24,600 for 3 years.  2014 it is AUD75,000 for 3 years.  So, the compounding growth of about 6% p.a.  

If we convert into RM, in 1994, the conversion is 1.8x, and 2014 is about 3.0x.  Lets see, in 1994 it is RM44,300 and 2014 is about RM225,000.  OK, what is the compounding rate increase for increase of 5x in 20 years?  It is about 8.5% p.a. in ringgit terms.  This excludes the inflation on FOOD.

Conclusion

INFLATION is a SILENT KILLER to our Financial Health, if we intend to send our kids to OVERSEAS.  We have not include parents that send their kids to international school form Year 1 to Year 11, it cost them another bom!

PROPERTY, EDUCATION, FOOD,  and CAR (MEDICAL, TRANSPORT, ELECTRICITY, ETC).  

ALL the big items are here.  The reason I mention car is because we subsidies Proton, in reality, our car price should be less than half if not for the high import duty to protect our Proton cars.

What should you do if you have RM1.0 million?

1. Invest in properties, condominium with rental exceed repayment of loan, or landed properties.

2. Invest in STOCKS

3. Invest overseas in STOCKS or PROPERTIES, or in MONEY MARKETS (to protect currency) or ETFs or GOLD?

Financial planning should not be overlooked to keep up with the SILENT KILLER.  In reality, it is tougher for the new generations to cope with HIGH COST of living, while its income increase is slower than inflation.

PART 7

TODAY's BIG TICKET ITEMS

HOUSE (PJ - landed) - RM1,000,000

CAR (Toyota Camry) - RM150,000 + ONE smaller car = RM80,000

TWO KIDs (Tertiary Edu overseas + Accomodation) - RM1,200,000 

TOTAL INCOME TO BE OUT OF LOAN = RM2,430,000 

GROSS HOUSEHOLD INCOME = RM30,000 PER MONTH = RM360,000 P.A. = 6.75 years

NET HOUSEHOLD INCOME = RM180,000 = 13.5 years

MOST LIKELY THE HOUSE is on loan, say 20 years loan, deposit of RM200,000 (Fama Scholarship), RM800,000 loan = instalment of RM5,000 per month.  Total repayment principal + Interest = RM1.2m (800k loan + 400k interest)