Strong growth projected for M'sia

By JAGDEV SINGH SIDHU
jagdev@thestar.com.my

Economists stick to full-year projections despite H2 slowdown expected
KUALA LUMPUR: The slowdown in economic data pointing to a cooling of the economy has some economists worried but many are sticking to earlier projections of strong full-year growth on the strength of the first-half numbers.
Economists said expectations of an economic slowdown in the second half of the year was anticipated but say the dip in export, industrial production and the health of the global economy adds to worries that next year would be more difficult to read.
“The stimulus packages and the huge low-base effect contributed to the strong first half but the picture globally is not pretty,” said an economist.
He said any slowdown would not lead to a recession this year given the momentum that had been built on so far but said next year’s performance, which would see slower economic growth, would be more worrisome.
The economy grew by 10.1% in the first quarter and 8.9% in the second quarter.
Uneasiness has cropped up after recent data came in on the soft side.
Export growth for August was 10.6% which was the fifth consecutive month of slower external trade and industrial production for growth for August was 4% after dipping to 3.4% after a reading of 9.3% in June.
Economists attribute the fasting month for the declines in export and also industrial production and believe a pick-up in September is imminent given the low-base effect from last year.
“Because of the low-base effect, the IPI for September could come in between 6% and 7%,” said an economist.
Economists had said external trade globally was sluggish given the direction leading indicators were pointing.
“Based on latest consensus forecast and our in-house calculations, the global economy is expected to average 3.7% year-on-year in the second half of 2010 after growing by 4.5% year-on-year in the first quarter of 2010 and 4.8% year-on-year in the second quarter of 2010,” said Maybank Investment Bank in a report recently.
While the general belief is that China would remain a locomotive for Asia, Malaysia’s export growth to China was a meagre 2.4% in August, causing some to wonder if that is a one-time blip. But the export growth rates to South-East Asia too have slowed in recent months and showed growth of 5.6% in August.
Working against exports has been the ringgit’s steep appreciation against the dollar this year which Maybank noted that apart from Malaysia, countries such as South Korea, Japan and Thailand were showing a significant slowdown in exports in recent months as their currencies gain strength.
Another insight to the health of the global economy is the appetite for companies to consume goods.
Global purchasing managers indices are still on the health side of 50 – anything below would mean a contract and a reading above 50 would mean expansion – but the global average has been falling over the past three months.
In Asia, the Purchasing Managers’ Index (PMI) for China shows an expansion with the index reading of 53.8 for September but in other parts of Asia where external trade is a big component of growth, the index reading is below 50.
Those countries with a reading below 50 are South Korea, Taiwan, Japan and Singapore.
“Softening PMI numbers alongside index of leading economic indicators also support the view that growth will be slower in the second half of this year,” said Maybank Investment Bank in a report.
An economist said a slight drop below a reading of 50 would not cause much stress but a reading in the mid-40 region would.
“The global PMI is a good indicator of trade,” said the economist.
While many are hoping that the last couple of months of economic data would not be a reflection of things to come, the message though has been clear.
“Going into 2011, very few people know what the outcome will be. It’s still uncertain.” said an economist.

Subsidy cuts without pay rise = tax hike

Making a Point - By Jagdev Singh Sidhu

IT’S been roughly a week since subsidies were cut marginally in Malaysia and judging by the reaction people have to it, I guess the public has taken it in stride.
After all, the increase in the cost of fuel, which is ultimately the biggest cost element among the other goods that saw prices rise, was small and well within what people can stomach.
The price increases in sugar and cooking gas were small when looking at what an average household would spend monthly to consume and use such goods.
The way subsidies were removed this time around was also properly handled. The message of why that needed to be done was clear.
Conversely, editorials and comments have stressed the point that the increase in government revenue of RM750mil from the subsidy rationalisation, along with how the Government spends taxpayer money, should also be more disciplined to avoid wastage and should be on projects, goods and services that have tangible benefits to the general population.
So far so good but the reality of things is that the subsidy cuts announced represent the first wave of what could be a series of cuts that would bring down the overall subsidy bill of the Government.
It’s quite likely too that future subsidy cuts could see the price of fuel, depending on the price of fuel internationally, and electricity rise. Along with that, sugar, flour, cooking gas, cooking fuel and maybe even other goods, services and utilities could also see a price increase.
And while the general population, especially the middle-class, has been quiet about the first cuts, there could be grumbles if the price increases do not correspond with the pay packet they bring home.
The reason for that is there is a feeling that urban inflation has grown quite a bit in recent years and that wages in Malaysia have not increased in keeping with the rise in the prices of consumables or even assets.
The increase in starting salaries for jobs in many industries today pales in comparison with how, say the price of a house, car or processed food has risen over the past years or even decades.
I know employers will say that salaries would have to reflect the productivity of employees, the growth of which has in recent years been poorer compared with how Malaysians in yesteryears used to attain.
There are also suggestions that the current labour laws, which make it difficult for employers to fire unproductive employees, are also an impediment to employers offering more lucrative salaries for their workers.
Changes to such laws are reportedly being looked at but there is still no guarantee wages would rise after that.
Unless salaries rise as a result of a more efficient marketplace brought about by the removal of subsidies and laws, the price hikes from future subsidy cuts would be viewed as a tax hike. And that could well raise the blood pressure of a lot of people.
·Deputy news editor Jagdev Singh Sidhu is now looking at a substantially smaller pay packet for the next few months, not from the subsidy cuts but the taxman.

June inflation rate rises to highest level since May 2009

By FINTAN NG
fintan@thestar.com.my

PETALING JAYA: Malaysia’s June inflation rate rose 1.7% to 113.7 from a year ago, reaching the highest level since May 2009 as prices began to normalise from last year’s low base.
The consumer price index (CPI) gained 1.6% in May 2010.
The Statistics Department said in a report that the CPI for June increased 0.2% compared to this May and rose 1.4% for the January to June period compared to the previous corresponding period.
The rise in the CPI was within economists’ expectations and also in line with a Bloomberg survey.
Economists who spoke to StarBiz recently said the CPI was expected to rise gradually although price increases for the year were expected to be moderate.
In June compared to a year ago, the food and non-alcoholic beverages index added 2.7%.
The indices for non-food increased 1.2%, transport gained 1.3%, housing, water, electricity, gas and other fuels added 0.8% while the services index rose 1.7% compared to a year ago.
The health and education indices added 1.6% and 1.8% respectively while the clothing and footwear index saw a 2% decline year-on-year.
The alcoholic beverages and tobacco index was up 3% and the restaurants and hotels index gained 1.8%.
The durable goods index increased 1.1%, the semi-durable good index declined 1.3% while the non-durable goods index rose 2.1%.

Do property bubbles always lead to crises?

They will increase economic downturn risks, but Asians should not be too worried

MANY of the world’s biggest economic crises in recent years originated from property bubbles. The list includes the US “subprime” crisis (2008), Japan’s economic stagnation (1992 onwards); and the financial crisis in Sweden (1991), Finland (1991), Norway (1987) and Spain (1977).
They were all largely triggered by property bubbles popping.
Today, it is therefore understandable that investors are concerned about property bubbles in Asia, especially in China; how would the property bubble affect China’s economy, and by extension Asia’s and the world’s economy.
The important question today I believe is not whether major economic crises are usually triggered by property bubbles, but do property bubbles always lead to banking and economic crises.

Property bubbles certainly increase economic downturn risks, especially when they pop. However, we do not think it will always lead to a banking and economic crisis.
First, property bubble-induced economic crises occur largely because there is cheap money (i.e. low borrowing cost) and excessive bank lending, giving rise to investment frenzy, including speculation. When the bubble pops, banks’ non-performing loans (NPLs) rise, causing banks’ capital to be insufficient.
Confidence about banks’ financial health then comes into question, which may lead to a bank run. Banks are then forced to cut back on credit, which in turn affects the economy, turning the property price collapse into an economic crisis.
The key to see if a property bubble burst leads to an economic crisis or not is whether there is excessive lending (high margin, lax lending) and substantial lending (high total banking exposure to property).
One case in point is the China property bubble burst of 2008 where some house prices in Shenzhen dropped as much as 40% (yes, there was one, overshadowed by the much bigger US property bubble popping) but there was no banking crisis.
Surprisingly, NPLs of Chinese banks did not rise in 2008 (as one would expect when property bubbles burst); instead they continued to fall (China’s total bank NPLs have fallen from above 12% of total loans in 2004 to 1.4% in 2010).
Until today, China’s banks are relatively secure because many buyers are required to pay high down payments (from a minimum of 20% to 30% for first mortgage, to 40% to 50% for subsequent mortgages). This high commitment of home buyers partly explains the lower risk for banks and the low default rate of mortgages (NPLs for China banks in mortgage loans are traditionally low, now at about less than 1%).
Another example is high-end properties in Hong Kong and Singapore. While there is no doubt it is a property price bubble, the systemic risk to the banking system and economy is less because it is more prevalent to luxury properties, coupled with less excessive bank lending.

Second, the size (volume and price) of a property bubble determines the negative impact to the economy when it pops. To illustrate, if the price of a single property unit increases significantly and then crashes sharply, there is really little impact to the economy. However, if there were millions of such transactions built up over the years, chances are that when the bubble pops, it will have very severe damage to the economy.
In Asia, recent property bubbles had relatively short time to build. Take, for example, the high-end property bubbles in China, Hong Kong and Singapore, which started approximately from about 2006 before they tumbled in 2008.
Compared with the build-up for the last supersize property bubble of the US (estimate from 2001 to a collapse in 2008) or Japan (estimate from 1986 to 1991), the run-up in Asia’s property bubbles today (essentially from 2009) has perhaps less time to accumulate high numbers of property transactions to reach a supersize bubble.
For example, on Sept 30, 2006, US Federal Deposit Insurance Corp data showed real estate loans might be in excess of 40% of US banks’ total lending. As comparison, according to a PIMCO report in 2010, the share of loans in China’s real estate sector is less than 20% of total lending.
So, should we be worried about the impact of property bubbles bursting in Asia, bringing Asian economies towards an often quoted “double-dip recession”?
I don’t think so, largely because of the following reasons:
·Asia’s banking system is resilient after the 1997/98 Asian fiinancial crisis revamp and remained strong, during and after the 2008 global financial crisis.
·Asian governments are acting very fast in curbing property bubbles, not allowing them to get too big; in particular Asian governments believe in market intervention as compared with Western preference to let free market forces decide.
·Asian bank housing mortgages are “recourse financing” (meaning one is liable for all losses even if the property is auctioned) as compared with “non-recourse financing” in the US (meaning after the property is foreclosed by the bank, one is no longer liable for further losses), therefore Asia’s borrowers are more committed.
·It is a cultural norm and quite common in Asia for an extended family to chip in during times of difficulties to help mortgage repayment.
·Asia’s property developers are also more careful in managing risks after experiencing the 1997/98 Asian financial crisis; many, such as in Malaysia and Singapore, use joint ventures with land owners to mitigate some of the risks.

The writer is the founder and chief investment officer of Singular Asset Management Sdn Bhd.

Go Asia for consumption stocks

By FINTAN NG
fintan@thestar.com.my

WITH equity markets continuing to be volatile for the foreseeable future, wary investors will be looking for pointers on where to put their money.
The global economy is still confronted by a bleak US jobs market outlook and further troubles brewing in the eurozone which may affect wider Europe.
There is also growing realisation that earnings upgrades have run beyond underlying economic fundamentals and business conditions, prompting investors to pull back.
As reported earlier in StarBiz, investors may look towards the US markets for some sort of lead as Wall Street kicks off the second quarter’s earnings report.
However, future corporate earnings growth, and therefore of the economy, may not be rosy as stimulus measures taken to boost growth at the height of the financial crisis wane, or are withdrawn, and consumers in the developed world continue to tighten their belt.
A report by ECM Libra Investment Bank Bhd research head Bernard Ching dated July 14 shows three underlying themes for investing in the third quarter in the local equity market.
He recommends a switch to high-dividend yield defensive stocks for capital preservation, buying undervalued cyclical stocks with exposure to domestic demand and consumption recovery in Asian economies and riding on the strengthening ringgit.
“We favour a defensive strategy over the next three months until there is better clarity in the fourth quarter,” he says.
Ching suggests accumulating undervalued stocks predominantly driven by consumption growth domestically and in Asia in view of external uncertainty and concerns over domestic policy.
“While exports to advanced economies may come under pressure due to tepid consumption growth, we believe Asia will take the lead in global consumption growth,” he says.
He adds that investors should ride on to the strengthening ringgit as structural issues such as high unemployment and fiscal deficit in the US, eurozone and Britain will make their currencies less attractive.
Fund managers are also picking up on the domestic consumption story in Asia with Fortress Capital Asset Management Sdn Bhd chief executive officer Thomas Yong preferring China, Hong Kong and Singapore due to their still strong growth prospects.
“We like the domestic consumption stories in all these markets and therefore prefer the consumer products and retailing sectors there,” he says.
Yong adds that the consumer theme includes the automobile sector. “As an extension, the China and Hong Kong markets also offer numerous proxies to US recovery in consumption spending – particularly sporting goods manufacturers,” he says.
Aberdeen Asset Management Sdn Bhd managing director Gerald Ambrose says the stronger balance sheets of the public and private sectors in the Asean markets make them attractive.
He recommends exposure to plays on Asean domestic economic activity such as the banking, retail, property development and insurance sectors.
“As the developed world keeps real interest rates below zero and prints money, that liquidity will find the best returns in Asean,” Ambrose adds.
He points out that Asean’s banking sectoris “relatively unpolluted by worthless proprietary trading books, their fiscal balances are sounder (Malaysia’s deficit is high, but almost entirely funded domestically) and the man in the street has savings as opposed to his developed world counterpart’s debt.”
Ambrose says the surest bet is the gradual strengthening of Asian, and especially Asean currencies, against the greenback, euro, sterling and yen.
He believes gold should be an important part of any investment portfolio as insurance against the folly of mainly developed countries’ central banks.
While Ambrose feels that inflation is under control and not an immediate threat, “if you keep printing money, inflation will occur”.
Both Ambrose and Yong are wary of commodities with the former saying that commodity price movements are greatly influenced by the economic health of China, the biggest swing contributor to demand growth.
“Any slowdown could lead to commodity price weakness,” Ambrose adds.
Yong says Fortress Capital typically shies away from investing in exotics such as commodities but remains bullish on oil prices over the long term.
On bonds, he says the favoured segment of the market “is probably shorter duration higher credit rating issues”.

Subsidy cut a bold move: Analysts

Malaysia surprisingly hiked fuel and sugar prices from today to reduce expensive subsidies, a controversial move that will save the government more than US$230 million this year alone.

But the decision could have serious political repercussions for Prime Minister Datuk Seri Najib Razak and it could spark a rise in prices of other goods and services, analysts said.

The government defended the subsidy cut, saying it was important to achieve development goals and promote healthier lifestyles.

“The government has made a difficult, but bold decision,” it said in a statement.

“By choosing to implement these modest subsidy reforms, we have taken a crucial step in the right direction towards meeting our commitment to reduce the fiscal deficit, without overburdening the Malaysian people.”

The cuts will save RM750 million, or US$234.4 million dollars, this year alone.

Malaysia will still be spending RM7.82 billion from now till the end of the year on subsidies for fuel and sugar.

“These measures are a demonstration of our fiscal esponsibility. They will enhance Malaysia’s financial stability, while also protecting the people,” the government said.

Khoo Kay Peng, a political analyst, said the move had caught consumers by surprise.

“The way it was announced has made many people unhappy,” he said.

“It will translate into votes against the government. Something is totally wrong with this government. The opposition will exploit and attack the government on this issue,” he said. - AFP

Investment Opportunity

M'sian banks enjoy demand for foreign currency accounts

By ELAINE ANG and SHARIDAN M. ALI
starbiz@thestar.com.my

Higher deposit rates and strengthening ringgit among reasons
PETALING JAYA: Banks continue to enjoy strong demand for foreign currency deposit accounts despite the strengthening ringgit and higher local interest rates.
While interest rates have risen, they are still relatively low at 2.4% to 3.0% (up to 12 months duration) compared with fixed deposit rates of popular foreign currencies such as Australian and New Zealand dollars.
Depositors have zeroed in on the Australian dollar foreign currency account, say bankers, as that currency offers a higher yield than what local deposit accounts would pay as well as Australia’s popularity as an educational destination.

Ong Shi Jie ... ‘Our recommendation of currency is very much dependent on customers’ needs.’

OCBC Bank (M) Bhd head of wealth management Ong Shi Jie said customers were looking to diversify their investment portfolio to include other currencies to enhance yields given the low interest rates offered by ringgit-denominated fixed deposits and also the turbulent equities market.
“We anticipate an increased acceptance of foreign currency fixed deposits by Malaysians partly due to the Government’s liberalisation of capital controls as well as the tougher investing environment in the equities space.
“This has, not surprisingly, led consumers to look for other avenues in their efforts to enhance yields. The low interest rate environment in Malaysia has also helped spur the hunt for alternatives,” she told StarBiz.
However, Ong cautioned that currency movements could be very volatile due to many factors.
“Our recommendation of currency is very much dependent on the customers’ needs.
“The identification of customers foreign currency needs is a crucial component of our sales process as opposed to taking a view on which currency would offer the best potential in terms of foreign exchange gains,’ she said.
According to Bank Negara statistics, total foreign currency deposits grew to RM48.3bil in May from RM40.4bil a year ago. The highest foreign currency deposit recorded in the period under review was RM52.4bil in March this year while the lowest was RM36.1bil in June 2009.
Public Bank Bhd chief operating officer Datuk Chang Kat Kiam said demand for foreign currency fixed deposit has also increased substantially due to the depreciation of major currencies such as the Australian dollar, Euro, New Zealand dollar, British pound and the US dollar against the ringgit.
For example, year-to-date the ringgit had appreciated by some 8.87% against the Australian dollar, thus making it a good time to accumulate the currency in expectation of future foreign exchange gains.
“The bank’s foreign currency deposits have recorded encouraging growth in the past six months with an average monthly growth of 5.91%,” Chang said.

Moving forward, he foresees demand for the major currencies to remain strong amid signs of slower global recovery which will lead to further tightening of interest rates by policy makers of these major currency countries.
The bank’s most popular currencies are US dollar, Australian dollar and British pound.
“The highest demand is for US dollar for trade purposes. The Australian dollar and British pound is in hot demand for investment and overseas education,” Chang said.
EON Bank Bhd head of wealth management and liabilities Low Kee Fui said the Australian dollar was the most popular currency based on recent customer trends.
“This is driven by parents who intend to send their children to pursue their studies in Australia as well as by investors looking to invest in Australia,” he said.
Low said the bank’s foreign currency deposit balance has grown by more than 50% in the past six months as the economy recovered and investor confidence returned.
“Going forward, we expect to see above average growth on the back of growing demand,” he said.
Malayan Banking Bhd deputy president and head (community financial services) Lim Hong Tat (pic) concurred.
“Currently the most popular is the Australian dollar, where interest rates range from 4.3% for a one-week deposit tenure to 5.05% for a year.
“This is followed by the New Zealand dollar offering interest rates from 2.6% for a one-month tenure to 3.75% for a year. The other currencies offer rates up to 0.3%,” he said.