US Slowdown and its impact on Malaysia Property
by J.Dunhill
When US subprime loan crisis worsen in the mid of 2007, Dow Jones taken a deep breath and so do all Asian markets including KLCI that fallen to 1100 level before it has rebounded to set record after record in early 2008. While I am writing this article, KLCI breached another new high to 1493 and look set to pass 1500 benchmark for the first time in history. Whereas, Dow Jones closed over night falling 238 points and S&P 500 dipped to 1390.
The continuous fall of Dow Jones Index since 1st day trading of 2008 extending it losses after Pakistan’s political turmoil till today has jittered many investors confidence. Many though that it will be the end of subprime loan crisis and the housing data will be more stable. To a certain extend, it painted a foggy picture to all investors that what is the reason the continuous fall in Dow Jones somehow lead to a continuous new height of KLCI?
The positive property prices and confidence level surely has been paused by this event in the pass six months and I believe many investors in the property market is taking a wait-and-see attitude. To a first time buyer, you may even think of wait for the property prices to come down before you enter into a long term investment. Our opinion is still extremely bullish for the local property market front and we share our points of view here.
US and Malaysia Economy Overview
US market has been enjoying a strong growth for the pass few years. In 2007 before the property bubble really burst in the housing market, Dow Jones created new high and even an initial slow down in housing data did not given any hassle to the stock market, employment data, GDP growth and so on. We are not here to discuss about the subprime crisis and the cause of the crisis. Rather, we share our view that after subprime crisis, will US heading to a recession? As we all know that US is by far still the largest economy body in the world. If a recession really hit US, no doubt, no matter how strong is Asia growing but will still be impacted at least in the mid term.
Is US heading towards a recession? First, we may need to understand the meaning of recession. Recession is defined when a GDP growth of a country is continuous moving south for at least 3 quarters. Certain industry can registers a recession like housing segment or manufacturing segment. But overall can be still in positive if other industries do well. Consumer spending is still high and the confidence index also high till late December of 2007.
Based on the data shown in the last 2 quarters of US economy, GDP growth is still at the north side. Most corporate earnings are beating expectation especially firms that already globalized themselves like Cisco, Microsoft, Google, Oracle, HP, IBM, Intel, Pfizer, just to name a few. Job data report is showing persistent gain but slow down in December 2007. Some argued that it is because of governmental recruitment and the actual non-farm payrolls are actually decreasing. Core inflation is still moderate even energy, food and commodities are creating new high. The only bad picture is the housing data registered more then 3 quarters of dipped and creating problems to financial institution and even Citibank, Bear Stearns and many are writing off billions dollar of losses due to this subprime crisis.
So in US, we have a moderate to strong GDP till date, strong corporate earnings, persistent job growth, strong consumer index but very weak housing data that also impacted blue chip financial institution and lead to some layoff in the pass few months.
How about in Malaysia? Well, we do not have much problem in the economy as we have solid corporate earnings, upward property market, strong commodities export (Oil & Plantation), growth in service industry, mix picture in manufacturing, 9MP development is still on its way, core inflation is manageable, strong job data, persistent internal growth in tourism, telecommunications, healthcare, infrastructure financial (Our banks are too small to be involved in subprime crisis) and because of soaring commodities prices, our mining sector also recovering and join the ever strong growth bandwagon.
Of course, they are some industries are not doing well. But it is not the economy factor but rather globalization factor that forces some industry either to change its focus or face down trend pressure. Typical manufacturing that competing in cost against China, India, Vietnam, Indonesia are facing challenges ahead but high value added manufacturing are remained stable. In this, the government policies are clearly supported a change in country economy model. We are also in the process to reduce the dependency for export to US market where export to other economy body like European Union, China, ASEAN is registering growth.
Overall, we have a solid fundamental of US economy and a strong fundamental of Malaysia economy. If it is a really an economy slow down, that will be always good for both cause high growth will also lead to unmanageable impacts. But will it be a recession? The facts shown it is still early to confirm and unless something very bad will happen in the coming months.
Monetary Policy on Interest Rate vs. Inflation
When credit feels the crunch in US, housing market is weak whereas everything else is still doing well. Federal Reserve of US has actually started to lower down its interest rate to cushion a possible recession. Bernanke and its board of committees are taken a gradual approach by lowering interest rate slowly that has not been welcomed by Wall Street’s folks. Again, the argument is the choice of maintaining manageable inflation rate or drastically lower down rate to avoid US slip into recession due to the subprime crisis.
Situation is a little different in US because this time, Fed is facing on one hand lower down the interest rate to help the market but on the other hand, lower rate will cause lower dollar that spice up the price of already bullish commodities prices like crude oil, food and metals. Thus, Fed opted for a gradual approach to contempt speculation in commodities prices. To certain extend, some commodities prices are speculated by traders that market demand has not shown strong growth to support the price. E.g. Actual oil demand in the world is estimated with a growth of 2.8% but analyst is predicting crude oil will surpass USD 150 per barrel in 2008.
I always believe the growth of China, India and Indonesia couple with the strong growth in ASEAN countries, Australia, South America and Europe are creating genuine demand for high commodities prices and it will be extended in the coming decade. But the rate of the increase is also somehow artificial inflated. Thus, the pressures will continue until sign of housing shown recovery to stabilize the current uncertainty. However, we expect US interest rate to continue to drop gradually for at least another 50 – 100 basis points in the next few quarters.
In Malaysia, as most segments are doing well and there is no need to lower down interest rate at this moment to stimulate economy growth. Lower dollar caused stronger ringgit and stronger economy give further support to the Ringgit. Strong currency does help in containing a little on inflation and this given us an optimum economy scenario against others. We have an optimum interest level with manageable inflation and growing GDP. As of today, Ringgit is around 3.27 for 1 dollar, 2.28 for 1 Singapore dollar and 2.87 for 1 Aussie dollar.
The only slight concern is if Federal Reserve is to lower down its interest rate further in the coming quarters. Bank Negara Malaysia (Central bank of Malaysia) may face pressure to lower its rate to reduce the upward pressures on Ringgit that may hurt our export and also potential hot fund that search for a higher return to Malaysia. Overall, local front interest rate is stable and potentially heading south. Commodities prices will still be a potential set back with upward pressure for the Fed and BNM when managing monetary policy via interest rate. It means, both Malaysia property and stock market will benefit from stable to a potential lower interest rate if it happened. The only concern is hot fund will become speculative and re-generate another 1993 bull run and then move away. This will not be a healthy thing to the economy.
Currency Strategy
Dollar heading south, is a good thing or a bad thing? Lower dollar boosts up the commodities price further. However, the rule has never changed as if one hand suffer but another hand will be benefited. For example, if crude oil price moves up to USD 120 per barrel, air lines industry will face sell down, follow by transportation and the spill over effect to other industries. But it benefits net oil export countries like Petronas, Shell and Exxon Mobil.
Thus, a lower dollar will cause American to buy more expensive commodities that lead to inflation pressure. But to my personal view, it can be a good timing where US treasuries department and Federal Reserve wanted to do this badly for so long. Due to its trade deficit has been swelled up for the past many years, US has tried to using trade negotiation approach with emerging markets in order to achieve balance. But it has faced many challenges with this approach and increasing deficit will be a long term issue for the US economy if Balance is not created.
Stronger dollar will continue to hurt US export and eventually lose it competitiveness and may not reserve enough and cover its national debts. United States is by far still the largest debtor to the world. The governmental bonds are largely held by Japan, South Korea, Europe and China are the largest holder of US government bonds.
What I am trying to address is the current situation may not be worrying cause it may solely not due to short to mid term economy crisis but can be a long term US strategy that start to devalue its currency to reduce the trade gap, maintain it competitiveness and reduce its US dollar bond debts to its creditors. Think about it.
For the local front, Ringgit is already undervalued when all ASEAN currencies recovered from 1997 currency crisis. Some other currencies are even above the pre-crisis level. We should see ringgit to move further between 3.0 to 3.1 level depending on Bank Negara’s policy. Indeed, in 2007 Ringgit should be traded around 3.0 – 3.2 level but I believe due to BNM intervention, it has closed around 3.3 – 3.4 level against US dollar in 2007. The reason is simple that it is our culture to protect our local manufacturing in order for them to have enough time to change into a high value added industry or move upstream before it is getting hurt by stronger Ringgit that still in a situation to compete cost with China.
In term of currency market trend, there is further sign that falling dollar can be good for US market and strengthening Ringgit trend will invite more local and foreign buyers for Malaysia property and a stable Malaysia economy. Needless to say cost of materials will continue to increase in 2008 giving more potential upward trend for local property price.
Stock Market
US Dow Jones closed at positive range for year on year basis and KLCI closed at a record high territory for year 2007. When comes to Dow Jones prediction, it is still early to say it is out from subprime crisis. Second liners and third liners stocks in US are dipping to new low in recent months whereas blue chips that make up the Dow Components are still holding well together with NASDAQ. As most of the Dow Components’ corporations are already globalized themselves, we foresee Dow Jones will hold up well and may re-challenge its new high of 14,000 level before end of the year. Most corporations will be benefited from the continuous trend of FED to reduce interest rate and soaring commodities prices to sustain the some energy companies that made up Dow Jones. On the other hand, NASDAQ by far is still unchallengeable because the native of the companies are well branded and in leadership position. This will cushion the effect of excessive pull back of Dow Jones and NASDAQ that may give further pressure to the property market in United States.
On KLCI front, at one point I have reviewed in 2007 that it will breach 1500 level in 2008 and the current momentum is faster then my estimation. I personally believed that as many matured emerging markets have move up a lot in 2007 like Hang Seng, STI, KOSPI, Shang Hai SE, AllORDS, many global funds may find expensive to invest in those markets and they are hungry for higher return. Thus, Malaysia sound economy and most valuation of stocks are still relatively cheaper then those mentioned market above. Fund managers may turn aggressively into KLSE and this year potentially can be another good year for KLCI. Further supports are national election is under way, 9MP is still on going, strong corporate earnings, regionalized results for some blue chips, lower corporate tax, stable to lower interest rate trend, positive fiscal policies from budget 2007/08 will create strong support to the stock market.
Related article - http://www.estate123.com/reviews_articles/article_review_detail.aspx?a_id=45
With Dow Jones able to hold up well and may re-challenge new high before end of year and KLCI is now set to go for another target at 1600 level. Stock market will give a strong support for another rally in 2008 for Malaysia property market. But bear in mind, in Malaysia, nothing is fast moving up due to our protectionism culture except Call Warrant traded in KLSE. Overall, bullish from stock market that will spill over to property market as well.
Our conclusion on Housing market for both US and Malaysia
For the US market, we always believe that it will not lead to a recession simply the government of United States of America and the whole world will not like it to be happened. As most of the banks hit by the crisis has written off as losses and the housing has dropped more then a year. A potential recovery is underway but the timing is the key. CIMB has also launched recovery fund and foresee US market will recover within 1-3 years time. Thus, we still bet there will not be any recession in United States and the local economy will still do well to support an optimum growth of the local property market.
Related article – http://www.estate123.com/reviews_articles/article_review_detail.aspx?a_id=A
|
