In his speech unveiling a RM7 billion economic stimulus in the Parliament, the Finance Minister Najib Razak touched on the earlier injection of RM5 billion into ValueCap (translated):
In stimulating the capital market, I announced an additional RM5 billion fund for ValueCap for the purpose of purchasing equities of companies which are priced lowly due to uncertainty in the global equity market but yet exhibit strong fundamentals. The fund will be secured through a loan from the government-guaranteed Employees’ Provident Funds (EPF). Therefore, the loan not only guarantees higher returns vis-a-vis deposit rate offered by banks but it also poses the least risk to the EPF.[1]
Firstly, in the current climate it is hard to believe that the secondary equity market is able to provide better returns in the short run compared to even the dull fixed deposit account. In the long run, maybe but with the stated goal of stimulating the local capital market, surely the investment horizon is short.
Secondly, the equity market is not the least risky options available. In fact, it is probably one of the riskiest there are out there due to its inherent uncertainty. It is hard to imagine why the stock market with erratic prices would be less risky than a fixed deposit which offers stable income stream. Furthermore, if the EPF is interested in investing the least risky field with local context, it should consider investing in risk-free government bonds.
The second point on riskiness as said by the Finance Minister could either be an outright lie or a very, very ill-advised statement.
In any case, the intention behind the injection is suspect, especially, as reported by The Malaysian Insider, ValueCap is due to repay its RM5 billion loan to its three shareholders, Khazanah, the EPF and PNB.[2] Information at hand at the moment suggests that the RM5 billion would be used to pay back those lenders; it appears that the EPF would be the one financing the repayment.
[1] — Untuk merangsang aktiviti pasaran modal, saya telah mengumumkan penambahan dana Valuecap sebanyak 5 bilion ringgit untuk pembelian ekuiti syarikat-syarikat yang mempunyai asas yang kukuh tetapi nilai pasaran mereka kini terjejas berikutan kesan pergolakan pasaran ekuiti global. Dana tambahan ini akan diperolehi melalui pinjaman daripada Kumpulan Wang Simpanan Pekerja (KWSP) yang dijamin oleh Kerajaan. Oleh itu, pinjaman ini bukan sahaja menjamin pulangan yang lebih tinggi daripada kadar deposit institusi perbankan, tetapi juga merupakan pelaburan yang mempunyai risiko yang paling minimum kepada KWSP. [Economic package unveiled (Updated with full text). The Star. November 4 2008]
[2] — KUALA LUMPUR, Nov 3 — State investment company Valuecap Sdn Bhd owes its three shareholders RM5.1 billion, which is due to be repaid in February 2009.
This debt, in the form of interest-bearing unsecured bonds, raises questions over plans for the Employees Provident Fund to lend RM5 billion to Valuecap to invest in the stock market.
In March 2003, Valuecap borrowed RM5.1 billion from shareholders Khazanah, Kumpulan Wang Amanah Pencen and Permodalan Nasional Bhd to invest in the stock market. At the time, world stock markets were bracing for a looming war in Iraq which followed on the September 2001 attacks on the US.
Valuecap’s bonds were due to be repaid in February 2006, but the company was given another three years to this coming February. At the end of 2006, the three shareholders each held RM1.7 billion in these bonds, according to documents obtained by The Malaysian Insider. [Question marks over Valuecap debt . The Malaysian Insider. November 3 2008]
8 replies on “[1826] Of the stock market offers minimum risk?”
Jed,
I think it’s really hard to defend that statement. That money is going to go to the stock market anyway. There’s really no different from EPF investing directly vis-a-vis giving it to ValueCap to invest in the same area.
Think of it as three interconnected balasts filled with water. A (the RM5 bil loan from EPF) is connected to B (ValueCap) and B to C (stock market). If Balast C is leaking, it will hurt B and in turn, it will hurt A. It’s basically the same risk. There’s little reason to believe it is safer to loan it to ValueCap than invest directly.
If ValueCap is burnt, there’s no way EPF could get back its the whole of its money. ValueCap simply would have to default. EPF could sue ValueCap for it I suppose but hey, who owns ValueCap? EPF would basically be suing itself. That wouldn’t make sense.
Already ValueCap seems unable to pay back the advance its 3 shareholders forwarded.
If the investment is so safe with high returns, why wouldn’t ValueCap get the money from traditional bank instead?
[…] Moo T commented on Hafiz’s blog: […]
Moo T..
If it’s a 10 percent interest on a junk bond, depends on your risk aversion, a matter of personal preference.
If you feel the risk is rewarded by the interest, you may take it.
Hafiz,
If EPF is investing in Valuecap, it’s definitely high risk and the loan better be at a high interest.
It’s is still safer than direct investment in the stock market.
But who are these fellas in Valuecap? Dun think EPF guidelines allow investment into junk private equity funds.
If the returns are so good, why not covert the loans into preference share holdings since the Government is the principle administrator of 3 major fund.
Dear Jed,
What he said is clear.
Oh, I left out details.
The RM20 millions Valuecap must pay back are just INTEREST fees. To pay back within 12 month, Valuecap must find RM416.67 millions EVERY month to pay back the loan, or choose to default the loan.
Sound familiar? If you remember 1998.
If EPF charge 5% interest on the RM5 billions funding, then valuecap must find a way to repay RM20 millions per month.
Now that is a puzzle to solve : where can valuecap find a business to make more than RM20 millions per month?
Jed Yoong : Are you naive of what? Tell me, will you invest on a junk bond that give 10% interest return? It is not matter of risk, it is a matter of stupidity.
I think he meant the loan from EPF will be high return, at the level of risk.
Stock markets are the riskiest form of investment ‘cos of volatility. But we all know that right?
Anyway, Najib at least sounds far more confident.
And I give it to him for withstanding all the assaults on him.
Hope you are keeping well.