Analysts say Malaysia economy is resilient and will be able to weather turmoil in Asia
BY TEE LIN SAY
THE rout in the stock markets is one that Asia has not seen for the past 12 years. Capital markets in emerging Asia appear to have the rug pulled from under their feet for a variety of reasons; some of which are out of their control while others are attributed to their own doing.
Capital markets in India, Indonesia and Malaysia have all experienced turbulence not seen for some time.
The concerns of investors who have acted in a herd like fashion are synonymous for each country. Slowing economic growth, fiscal deficits and weaknesses in the current accounts have sparked a flight of capital from the stock, bond and currency markets of those countries.
There are differences too, such as inflation not being an issue in Malaysia but the tapering of the US Federal Reserves bond buyback programme signals the end of easy money for a number of countries.
The drop in the markets has an effect on some investors, who a month ago, were sitting on a healthy profit from a year ago.
But it’s not all doom and gloom. Capital Dynamics managing director Tan Teng Boo sees opportunity in the recent market selldown. His portfolio has been sitting on 50% cash since the beginning of the year.
He is not buying yet as he feels there is still some more downside in the financial markets.
The selldown has taken a chunk of the gains registered so far this year. The markets, however, have propped up the past two days,
While the FBM KLCI is presently down some 7% since mid-July high, it is still 0.91% higher than what it was on Jan 2, and 3.6% higher 52 weeks ago. It closed Thursday at 1,703.78 points and is still trading at a price earnings ratio of 15.98 times.
The last three weeks have been turmoil for South-East Asian markets on concerns over tapering quantitative easing in the United States, slowing growth and current account deficits, The situation is compounded by a potential US strike on Syria.
The irony is that markets are falling because the US economy is getting stronger. Since November 2008, with US unemployment rates high, the Federal Reserve launched Quantitative Easing (QE) one and two. QE3, launched in September 2012, saw the Fed pumping US$85bil every month into the system. That left the global markets awashed with liquidity.
That liquidity has been a huge reason for stockmarkets to rally and asset prices to rise.
Since May this year though, the Fed changed its tune. With the United States appearing to be in better footing, it may want to start tapering its bond buyback programme.
Of the many indicators available, the most closely watched would be the unemployment rate, which stood at 7.4% as of June, the lowest level since December 2008.
Consumer confidence rose to a 5½-year high in August on growing optimism that business, hiring and wages could pick up in coming months. Consumer confidence index edged up to 81.5 in August from 81 in July.
This deluge of good news was, however, bad for Asia. Funds decided it was time to get back to the United States. That’s when the freefall started in Asia.
Stocks markets in India, Malaysia, Thailand, the Philippines and Indonesia have suffered big declines since May.
Notably, the rupee has dropped close to 20% on a year-to-date basis, while the ringgit is now trading at RM3.33 to the dollar, a new three-year low.
This market turbulence is also coming on the heels of recent cuts in Asian gross domestic product growth estimates, most notably for China.
Allianz Malaysia Bhd chief investment officer Esther Ong Chen Woon says that the QE tapering has to some extent, been priced into the market as its possibility was already highlighted to the market a few months ago. When coupled with the nascent signs of a recovery in the developed market, it resulted in some liquidity outflow of funds back to the developed markets from Asean.
Standard & Poors noted that the sell-off in emerging Asia can be seen in the movement and composition of exchange rates and equity indices.
“The Asia ex-Japan currency index has depreciated by 4.6% against the US dollar since early May; however, the index composition has been skewed toward South and South-East Asia, where the region’s external deficits are concentrated,” says the firm.
Turbulence in the markets coincided with poorer growth forecasts. China’s growth forecast has been aggressively slashed by many research houses to the 7.5% level for 2013 and 7% in 2014 after 4.5 years of break neck growth.
Under new Premier Li Keqiang, Beijing is willing tolerate slower growth as it pushes reforms designed to reduce pollution, social inequity and an economic growth model which has an over reliance on debt financed construction and exports.
“The growing risk aversion of capital market participants may have led them to lower their exposure to India and Indonesia, but both economies face similar challenges. Uncertainty about how these countries will address their problems is keeping investors away.
“Specifically, both economies are grappling with the costs of subsidising food or fuel or both, as well as ongoing investor concerns about the friendliness of the investment regime. The former keeps spending high and worsens the current account; the latter makes the current account more difficult to finance, weakening the exchange rate,” said Standard & Poor’s.
Ong feels that the Malaysian economy should remain fairly resilient as it currently does not suffer significant account imbalances.
“We have the Economic Transformation Programme (ETP), a structured plan to promote national growth at a healthy pace, private investment momentum is increasing and we boast of strong foreign reserves which is approximately 50% above the level at end 2008 during the last global financial crisis,” she says.
Furthermore, Ong adds that Malaysia is fortunate to have reserves of commodities such as palm oil as well as oil and gas.
“Even on the corporate front, most companies have improved balance sheet strength and better corporate governance,” she says.
Is Asia in trouble?
Allianz’s Ong admits that Malaysia is experiencing some stress as its currency weakens along with the rest of the Asean countries.
“While the short-term volatility was certainly not welcomed, it served to highlight that it was imperative to enact some of the fiscal reforms that would hold Malaysia in better stead over the longer term. Nonetheless, it is worthwhile noting that Malaysia’s fundamentals have improved greatly since the Asian financial crisis. There is a significant amount of liquidity in the system. Our reserves are ample and it must be highlighted that we have relatively very low foreign debt relative to GDP,” says Ong.
Danny Wong, CEO of Areca Capital says: “This isn’t a fundamental issue. With our kind of GDP numbers, we aren’t anywhere close to a recession. Yes, our current account is down, but it is still positive. We do have debts, but once they are addressed in the next budget, it should not be an issue.” Wong adds that contributing to Malaysia’s smaller current account is the importing of capital goods and services for infrastructure development.
“These are the goods for our infrastructure projects under the ETP. I would safely say that in the next one to two years, our GDP and foreign direct investments will improve, along with the recovery in developed markets. The ETP has already been underway for some two years now. So we don’t expect to see so much capital goods being imported anymore. Furthermore, a weakening ringgit will also help our exports. Stronger exports and lesser imports will address our deficit issue,” explains Wong.
Fortress Capital Asset Management (M) Sdn Bhd chief executive officer Thomas Yong feels that the drop in markets recently is more of a “liquidity rush out” and what had been happening is more of a knee jerk reaction.
“Corporate debt levels are not abnormally high. From a regional perspective, we don’t expect to see this spreading like last time. There is no reason of concern for a regional crisis,” says Yong.
Yong feels the Asean growth story was a bit overdone. While many emerging markets have dropped severely, Yong adds that many funds do not hold emerging markets as a core or structural holding.
“They treat emerging markets like a trading position. So when they see the currency weakening, they will not hesitate to sell off that position,” he said.
“Well what do you expect when Asian markets have been running more or less for three years? A correction is to be expected, although people did not expect it to be done so drastically.”
Yong adds that from a fundamental perspective, Malaysia was not under any sort of stress. After all, its reserves were high and it still has surpluses.
The country’s foreign exchange reserves level stood at US$137.9bil (RM456.5bil) as of Aug 15.
Meanwhile, Malaysia’s current account surplus for the second quarter of the year narrowed to RM2.6bil from RM8.7bil in the preceding quarter. This was due to lower goods surplus as well as sustained services deficit and outflows in the income accounts.
Market in for correction
Wong says that from the FBM KLCI’s peak of 1,810 on July 24 to its low of 1,686 on Aug 28, the market has dropped some 124 points, this would qualify as a correction, which is a healthy thing.
“In our case, we look at specific stocks. If you feel your stock has dropped to an attractive level, then yes, it would be a good time to buy. Don’t listen to the noise,” says Wong.
Meanwhile, Yong opines that the drop in Asian markets has in fact made Malaysia look more expensive comparatively.
“The market dropped the lowest because our foreign holdings are the smallest. Valuations wise, we are the richest, and our growth is moderate,” says Yong.
Yong is bottom picking in China.
Putting things into perspective, Ong says that the first signs of a sell-off was triggered by the signal of quantitative easing tapering, followed by moderation of growth outlook in China, weaker external trade, weaker commodity prices, and lastly triggered by the concerns of our own easing fiscal health.
“We are cognisant of the necessity for countries in this region to adjust, reform or beef up fiscal strength to counter the threat of liquidity outflows. However, we could still face some volatility in the short to medium term but we are of the opinion that such sharp drops do create opportunities of accumulate fundamentally strong stocks that like for longer term outperformances. Furthermore, this is in line with our positive view on the long term growth prospects of Malaysia,” she said.