MARKET REPORT AND STRATEGY

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Tamsin Nash
5 years ago
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1 MARKET OUTLOOK AND STRATEGY MAY 2009 Market Review The KLCI ended May 53 points or 5.4% higher to close at 1,044 points. Although the announcement of 1Q09 GDP on May 27 was indeed weak at 6.2%, nearly double consensus estimates, the market took the bad news in its stride. Also, results released during the month were also not as bad as feared, and helped contribute to the market s firm performance. The market appreciated on heavy volume and was again broad-based, rotating between big cap blue chips and second and third-liner stocks. The broader market s performance was better than the KLCI as FBM Emas gained 6.8% to 6,984 points. Smaller caps also did better as FBM KL 2nd Board rose 6.2% to 4,575 points while FMB MDQ jumped 16% to 4,040 points. The average value traded on Bursa in May surged 50% mom to RM1.84bn (RM1.23bn in Apr) per day. During the month, daily trading volume nearly touched 4bn units at its peak, its highest level in 27 months. Regional markets continue to be driven by the mass amount of liquidity inflow. A massive surge was recorded in India post its favourable election results with a 36.6% gain, followed by Singapore (23.8%), Thailand (16.7%), Philippines (16.1%) and China (16.1%). There were no losses for the month with all market in the positive territory. The laggards in terms of performance are however Korea (+4.0%), Malaysia (6.9%) and Australia (9.5%). MSCI Country Indices 4/30/2009 5/29/2009 % Change YTD % MSCI AC ASIA x JAPAN % 34.9% MSCI AC ASIA PAC EX JAPN % 30.1% MSCI Australia USD % 17.8% MSCI Emerging Markets China USD % 30.4% MSCI Hong Kong USD 5, , % 34.9% MSCI Emerging Markets India USD % 60.7% MSCI Emerging Markets Indonesia USD % 46.3% MSCI Japan USD 1, , % -0.1% MSCI Emerging Markets Korea USD % 24.4% MSCI Malaysia USD % 19.2% MSCI Emerging Markets Philippines USD % 29.1% MSCI Singapore USD 2, , % 30.6% MSCI Emerging Markets Taiwan USD % 46.5% MSCI Emerging Markets Thailand USD % 28.4%

2 Malaysian Economy 1Q09 GDP takes a hit. The external headwinds hit the economy with full force in 1Q09, with real GDP contracting sharply by 6.2% yoy. This marks the sharpest pace of decline since 4Q98 when GDP contracted by 11.2%.Hampered by the slump in exports as well as falling investment, real GDP reversed from virtually flat growth in 4Q08 to contract markedly by 6.2% in 1Q09. The 1Q09 GDP contraction is worse than market expectations of -3.5%. On qoq basis, 1Q real GDP declined by 7.7% (-3.4% in 4Q08).

3 Domestic demand falters on falling consumption and investment. Domestic demand contracted by 2.9% yoy in 1Q09, with private consumption posting a small decline of 0.7%, its slowest pace since 1Q99 (-2.7%). The spike in retrenchments and deteriorating labour market conditions has led to concerns over job security and an erosion of consumer confidence. Fixed investment contracted sharply for the second consecutive quarter by 10.8% in 1Q09 (- 10.2% in 4Q08) as private investment plummeted in reaction to the fast-deteriorating global demand. Public development spending was higher.

Private consumption growth faltered to decline marginally by 0.7% in 1Q09 (+5.3% in 4Q08), as consumers turned cautious on concerns over job security and consumer confidence weakened.

4 Private consumption growth faltered to decline marginally by 0.7% in 1Q09 (+5.3% in 4Q08), as consumers turned cautious on concerns over job security and consumer confidence weakened. Further denting consumer confidence was the sharp fall in equity prices since 4Q08 before climbing up in the beginning of Apr 09. The MIER Consumer Sentiment index up moderately from 71.4pts in 4Q08 to 78.9pts in 1Q09. The pace of retrenchment has eased in April (2,871 persons) from 4,197 persons per month in 1Q09 and 3,316 persons per month in 2H08. We estimate private consumption to grow modestly by 1.5% in 2009 against a strong 8.4% growth in 2008.

Total fixed investment contracted for the second consecutive quarter by 10.8% in 1Q09 (- 10.2% in 4Q08) due largely to a sharp decline in private investment amid higher public investment.

5 Total fixed investment contracted for the second consecutive quarter by 10.8% in 1Q09 (- 10.2% in 4Q08) due largely to a sharp decline in private investment amid higher public investment. Private investment indicators confirmed the continued contraction of investment and these included a 6.9% drop in imports of capital goods, a 67.1% fall in approved manufacturing investments to RM7.5bn in 1Q09 and a contraction in business loan indicators. In 1Q09, federal government s gross development expenditure rose 55.4% yoy to RM8.2bn in 1Q09, reflecting higher spending on agriculture, rural development and education. We estimate total fixed investment to increase between % in 2009 (+1.1% in 2008) due solely to higher public investment.

7 Contractions in all sectors, except the construction sector The services sector succumbed to the fallout in the manufacturing sector to decline marginally by 0.1% in 1Q09 (+5.7% in 4Q08). The drag came from the decline in output of the utilities sub-sector (-8.2%), real estate and business services (-6.7%), transport and storage (- 3.9%), as well as wholesale and retail trade (-1.7%). The finance and insurance sub-sector increased moderately by 1.2%, underpinned by continued bank lending to both households and businesses. Growth of the communication, accommodation and restaurant subsectors also slowed. The still sluggish external trade activity as well as weak domestic demand is expected to dampen the growth of the services sector. The manufacturing sector suffered the sharpest contraction of 17.6% in 1Q09 (-8.8% in 4Q08), largely pulled down by the sluggish global demand, and was most evident in the electronics and electrical products industry. Output growth of export-oriented industries declined steeply by 23.1% in 1Q09 (-13.4% in 4Q08). Output growth of domestic-oriented industries fell at a larger magnitude of 15.9% in 1Q09 (-2.0% in 4Q08), due to a much slower pace of construction activities. Overall, capacity utilisation of the manufacturing sector fell to 59% in 1Q09 (66% in 4Q08), with the export-oriented industries operating at 62% (67.0% in 4Q08) and for domesticoriented industries at 53.0% (64.0% in 4Q08). The mining sector contracted by 5.2% in 1Q09 (-5.7% in 4Q08) following lower output of crude oil (-5.7%) and natural gas (-4.7%). The agriculture sector declined by 4.3% in 1Q09 (0.5% in 4Q08) due to lower production of palm oil and rubber. The construction sector is only the sector registered a small increase of 0.6% in 1Q09, a turnaround from a contraction of 1.6% in 4Q08. This was supported by higher construction of office space and the development of high-end residential sub-sector. Growth of the civilengineering sub-sector was dampened by the slower take-off of some key infrastructure projects. We expect the construction sector to grow by 2.6% this year and 4.0% in 2010, riding on the accelerated pace of government spending. The implementation of the first phase of RM3.9bn Pahang-Selangor inter-state water transfer project in Jun 09 is expected to provide some lift to the sector going into 2010.

9 There were lower inflows of FDIs, while portfolio outflows subside. Gross inflows of foreign direct investment (FDI), as monitored by BNM s Cash BOP system were lower at RM6.4bn in 1Q09 (RM9.0bn in 4Q08), due mainly to a decline in inflows of equity capital and the drawdown of intercompany loans. The bulk of FDI was directed into the oil and gas sector, services (the real estate and business services, wholesale and retail trade as well as transport subsectors) and manufacturing sector (for investment in the electronics and electrical products, solar cells and basic metal industries). Overseas investment by Malaysian companies recorded a lower net outflow of RM3.0bn in 1Q09 (-RM8.1bn in 4Q08). These were mainly for acquisition of strategic stakes in a bank and a power plant in the region. There were investments in real estate and business services, and wholesale and retail trade sub-sectors. The global financial crisis and economic downturn are likely to reduce FDI inflows, and the daunting domestic environment will likely weigh on domestic investment. As such, we project manufacturing investment approvals to ease sharply to RM15.0bn- RM20.0bn in 2009 from RM62.8bn in Foreign direct investments are estimated to shrink to RM5.0bn from RM26.6bn in 2008 due to the shrinking FDI flows following the continued global financial deleveraging process.

10 Portfolio investment outflows subside to record a smaller net outflows of RM9.5bn in 1Q09 (-RM24.8bn in 4Q08), reflecting continued liquidation of both equities and debt securities by foreign investors. In 2008, portfolio investment posted a net outflow of RM92.3bn following two straight years of net inflows (+RM12.9bn in 2006 and +RM18.4bn in 2007). Going forward, we expect to see smaller net outflows of portfolio investments or possibly a reversal to net inflows in 2H09, reflecting lower a risk premium as well as the improved corporate earnings. The improved investor sentiments as well as market expectations that the global financial market conditions are about to stabilise towards year-end has also led to some resumption of capital flows into emerging markets, including Malaysia.

Fiscal deficit stands at RM6.7bn or 4.3% of GDP in 1Q09. The federal government recorded a fiscal deficit of RM6.7bn or 4.3% of GDP in 1Q09. Federal revenue rose strongly by 28.3% to RM35.

11 Fiscal deficit stands at RM6.7bn or 4.3% of GDP in 1Q09. The federal government recorded a fiscal deficit of RM6.7bn or 4.3% of GDP in 1Q09. Federal revenue rose strongly by 28.3% to RM35.9bn, while operating expenditure increased 12.9% to RM34.4bn, mainly for payments of supplies and services, and grants and transfers to statutory bodies. Development expenditure surged 55.4% to RM8.2bn in 1Q09, due to higher spending on agriculture, rural development and education.

The 2009 s fiscal deficit is estimated at 7.6% of GDP this year or possibly even higher at 8.0-8.6% of GDP in 2010. With ample domestic liquidity, high national savings (32.

12 The 2009 s fiscal deficit is estimated at 7.6% of GDP this year or possibly even higher at % of GDP in With ample domestic liquidity, high national savings (32.2% of GNP as at end-2008) as well as low public debt (41.1% of GDP as at end-08), we do not foresee any problems funding the budget deficit. The big plus point is that the current account of the balance of payments remains in a surplus estimated at % of GDP, which will ensure ample liquidity in the system and not crowd out private sector investments. We need to step up government spending to bring the intended impact on the economy. Under the first RM7.0bn stimulus package, a sum of RM6.0bn has been disbursed to the agencies and ministries, of which RM3.5bn of projects are currently under various stages of implementation. The actual billings of payments are about RM800m. As such, the stronger impact of fiscal stimulus package will be felt more in 2H09 and in As at end 1Q09, total outstanding debt of the federal government amounted to RM317.1bn or 45.9% of GDP (41.5% of GDP as at end-dec 08). Domestic debt rose to RM297.0bn or 43.0% of GDP (RM286.1bn or 38.7% of GDP as at end-dec 08), while external debt remained stable at RM20.2bn or 2.9% of GDP (RM20.3bn or 2.8% of GDP as at end- Dec 08). Malaysia s total external debt increased to RM243.8bn or US$66.1bn as at end-mar 09 (RM236.2bn or US$67.4bn as at end-dec 08). Total short-term external debt also increased to RM84.3bn or US$22.9bn as at end-mar 09 (RM79.6bn as at end-dec 08) due mainly to inter-bank borrowing activities. Short-term debt accounted for 34.6% of total external debt and was 26.3% of the net international reserves.

13 Malaysia s leading index declined for the fifth consecutive month by 0.7% in February but at a much smaller pace when compared to -3.0% in January. This signals that the economic downturn will likely continue into 2H, albeit milder. Interest rates to stay put at 2.00%. Bank Negara Malaysia (BNM) signaled that interest rates are at appropriate levels to support growth and the focus will be on improving access to financing. Since Nov 08, Bank Negara Malaysia (BNM) has slashed rates by a cumulative 150bp to 2.00% currently to shore up domestic demand. BNM also reiterated that the frontloading of rate cuts and credit enhancement measures are sufficient to support domestic demand. As such, the accelerated and effective implementation of fiscal spending is much needed now to help resume a moderately positive growth going forward.

14 Domestic Equity Strategy The market liquidity binge continued to confound fundamentalists as the current rally continues into the second month with no signs of any normal pullback and consolidation. However, there is some normalization in behavior, as Asian markets outperformed developed markets in general; and Malaysia underperformed the region. The broad risk factors monitored continue to show improvement (or less deterioration as feared) emboldening more funds to be allocated to higher risk assets. Locally, the worser-than-expected 1Q GDP and the monetary policy stance was shrugged off by the market, which continued its slow (relative against the region) upward pace. Corporate results were not as bad as projected by analysts, which led to cautious expectations for a mild and probably uneven recovery. Consumption in big-ticket items were surprisingly firm in this environment, judging from the 5/95 mortgage plans to stimulate property sales. The disconnect in the market between price and valuations is profoundly expressed and reflected in the brokers index targets for this year. Of the 11 brokers that we follow, only 8 have KLCI targets for 2009 below 1000, below current price levels. Only 1 broker has a target that is higher. Only 2 of the 11 brokers have revised their targets upwards, and the rest have not changed their expectations for the year. This is similarly expressed in the average of the brokers price targets for the largest capitalisation stocks listed in Bursa. Of the top 7 counters, 6 companies have target prices lower than their current price as compiled by Bloomberg. If the projections are correct, most brokers are expecting the market to fall and close the year lower than current prices. However, we are seeing initial signs of upgrades coming in. What could cause the liquidity run to falter? There are several possibilities. Firstly the fundamentals may not keep up with the market expectations. Secondly, the global economy could have an extended recovery or double dip recession. The trillions in new government debt issued and massive capital-raising could soak up a lot of the liquidity. However, there are no signs of that happening in the short term. Hence we are increasing out asset allocation marginally to accommodate the rising value of the portfolio, rather than for new purchases. We will continue to ride the current liquidity wave.

Institue of Strategic and International Studies (ISIS) Malaysia.

Institue of Strategic and International Studies (ISIS) Malaysia www.isis.org.my MALAYSIAN RESPONSES TO THE GLOBAL ECONOMIC AND FINANCIAL CRISIS Mahani Zainal Abidin ISIS Malaysia 6 February 2009 Institue