Another commentary on Malaysia economic condition. PRUFlash
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What happened to Malaysia market?
The last two months was a roller coster ride of volatility for Malaysia and global markets. Malaysia’s own political problems were overshadowed by the global financial crisis which had been unraveling for some time, but the proverbial straw that broke the camel’s back was the bankruptcy of the US investment bank, Lehman Brothers and AIG’s call to the US treasury to borrow US$85billion to address their cash deficit. AIG was subsequently bailed out, Lehman was left to fail, and Central Banks worldwide made a concerted effort to strengthen their financial systems, which included nationalizing banks if required.
Despite the global financial crises unraveling, Malaysia was relatively defensive (and still is), before succumbing to massive foreign selling in October, breaching the psychological 1000 points for the KLCI. Malaysia is definitely on a stronger footing compare to 1997-98 Asian Financial crisis, with strong foreign reserves to cover 8-9 months of net imports and a banking system that was fairly insulated form the subprime problems of the US. However, Malaysia was not spare by the global sell-down, falling 25.6% since end of August 2008. The government announcement of injecting Rm5billion to Valuecap (with funds borrowed from EPF) to buy up “undervalued” stock list on Bursa could not stem the selling, which was overwhelmed by foreign funds experiencing redemption.
Easing oil price and the impact
Although there was some relief from inflationary pressures with crude oil prices coming off, the speed at which it declined was a concern, falling form the high USD147/barrel in July 2008 to recent low of USD62.73/barrel (-57.3%). In tandem with the crude oil prices falling sharply, commodities globally took a beating, including crude palm oil (CPO) which fell form RM3000/ton in July to recent lows of RM1420/ton (-53%). Sharp declines in prices for both commodities is negative for Malaysia, as we are still net exporters of oil, and our exports were held up by the stronger commodity prices. In addition, the strong oil prices resulted in oil related income being a bigger portion of the Government’s revenue (estimated 30-40%) compared to previous years where it was just 15%. This boost in income helped the government increase fiscal spending, which may be at risk going forward. Rising rural income due to the strong CPO prices, plantation stocks on Bursa fell sharply. IOI Corporation fell 54.8% since 29th August 2008, KLK fell 40%, Sime Darby fell 13.2%. Given the heavy weight of the plantation sector on KLCI, it was inevitable that the KLCI had to fall in tandem.
What can we expect going forward?
Malaysia’s 2009 GDP may be at risk, given the lower CPO and crude oil prices, and the slowing global economy. Previous government’s forecast of 5.4% for 2009 is probably not achievable. The Ministry of Finance is due to release their latest assessment of economic outlook to the parliament on 4th Nov 2008, including revised economic numbers, where GDP is expected to be revised to about 4-4.5% for 2009. The Minister of Finance has also acknowledged that the government’s ability to pump prime will be constrained by the already high budget deficit and hence projects will be re-prioritized to focus on those with higher multiplier effects.
Results reporting season in November will see a slew of forecast downgrades by analysts. Depending on how successful global central banks are at containing the financial crisis, and the impact on global economic growth, we may see more earnings downgrades early next year. The strong US dollar against ringgit has been negative for exporting companies (such as plantation players and E&E companies), or companies that are net importers like auto players, and companies with high USD or Japanese yen denominated debt.
Malaysia politics, although sidelined for now, may see some stability once the UMNO General Assembly is over (which is currently still slate until March 2009). Hence, despite all negative newsflow of late and high market volatility, this provides us the perfect opportunity to accummulate quality stocks at very attractive levels. However, given Malaysia’s relative defensiveness against their peers, it is likely that Malaysia will underperform on any bounce up regionally.
