By Xavier Kong
Pong Teng Siew
Recent times have seen volatility in the FBM KLCI, as the Malaysian market reacted to the slump in regional markets, of which China led the pack due to an economic slowdown as well as worries of a disruptive transition. Closing at 1,642.75 on Jan 13, the Malaysian market is looking at a descent from when it closed at 1,692.51 at the end of 2015.
Inter-Pacific Securities head of research Pong Teng Siew noted that this was a well-controlled descent, compared to several other regional markets that have gone dropped into bearish regions.
“Singapore, Indonesia, the Philippines, Taiwan, all of these were among the best-performing markets. Now they are moving into what can already be called bear market territory. The FBM KLCI started falling earlier than they did, but it is still a controlled descent due to the resistance of the index by several big blue chips, who have taken the hits instead,” said Pong, adding that some blue chips with state-owned funds as their major shareholders have not fallen, giving IHH as an example.
“It is a blue chip that could be looking at 70 times in price-to-earnings ratio, but with Khazanah, the largest stakeholder, not letting go of any share at all, IHH would not fall. Chips like these are supporting the local index,” explained Pong, adding that support levels are temporary in current times. However, the head of research expects the index to be supported at 1,600.
However, the weakness in regional markets could be traced back to the weakness of China’s markets at this time, due to a slowdown in economic growth, along with the concerns that the transition to a slower and more sustainable rate of growth would prove disruptive.
Yeah Kim Leng
Business school dean at the Malaysia University of Science and Technology Yeah Kim Leng noted that the weakness is due to slowdown in global demand, which has in turn weakened exports from China, which is an economy based on exports and investments. However, China is currently shifting to be more consumption driven, but the consumption has been weaker than projected, according to Yeah, leading to uncertainties about the transition.
“There is also the matter of China’s manufacturing capacity, which is now in excess. This is compounded by weakening demand, and in turn weakens industrial production,” noted Yeah.
Pong had noted that China is struggling to find domestic growth, considering the weakness of the nation’s exports at the moment.
“The struggle is to look for domestic growth, but with the headwinds in the property market, China will have to really struggle. The only bright spot remains the service sector, which can see growth. Still, any growth domestically would remain weak,” said Pong.
The head of research also warned against the mentality that the slump in the Chinese market was none of Malaysia’s concern. According to Pong, the NYSE is at a new low, with other indices soon to follow.
“US markets are giving a false sense of security to Asian markets. More than two-thirds of stocks in the US market are already down 20% or more,” said Pong, adding that the risk in Malaysia’s own market is understated as well, with the attention all on small caps which are growing on weak commodity prices as well as the weak ringgit.
Pong noted that the result would be sharp spikes in small caps, whose valuations would then overshoot. Small caps are ill equipped to handle the volume traded, which is not sustainable. Pong called this the herd mentality of many people wanting to make a quick buck thinking of the same idea at the same time.
Yeah pointed out that sentiment would indeed be affected by the slowdown in China, with uncertainty affecting global demand, which in turn affects the underlying economy. However, the reaction in Malaysia looks to be only on the capital market, with the more direct, and worrying, impact actually on trade channels.
“Malaysian exporters will have to look for other places to export to, such as the US, to help offset the decline in China,” said Yeah, noting that the lower commodity prices are also tied to the Chinese slowdown, which would lead to commodity exporters like Malaysia seeing slower growth on that front.
However, the issue in China remains a long term problem as well.
“In the long term, if the current situation is maintained, China runs the risk of a larger devaluation,” noted Pong, adding that the previous devaluation of about 2% in August 2015 did not do enough, and that China may be looking at a devaluation of between 10% and 15% before a sufficient impact can be seen.
“The move (to devalue by 10% to 15%) will destabilise the currency, but it would save China’s deteriorating export,” noted Pong, adding that China may recover and regain some measure of competitiveness. As for how long it would take for China to adjust and stabilise, both Pong and Yeah noted that the time frame is hard to say.
“China is affected not only by the performance of other countries, but also by the internal adjustment, particularly from the redistribution of resources. The key is that infrastructure investments will continue to support growth, though this will be slower.
“Moving towards a green economy, upgrading the economy through technology, improving productivity, and dealing with unemployment will all help China to sustain the market,” said Yeah, noting that if China could sustain a growth of about 6% and sustain it through employment, it would help the country to hold up, as well as prevent socio-economic problems.
“As it is, resisting pressure is more painful over the long term than just letting the currency drop. The Hong Kong Inter-bank Offered Rate (Hibor) has shot up, and it seems like the People’s Bank of China (PBOC) is looking to strengthen the value of offshore yuan, trying to cut down on the difference between the offshore yuan and onshore yuan,” noted Pong, explaining that the difference between the two values is seen as stress.
“They (PBOC) are trying to narrow the gap to hide the pressure, but this is a short term measure, and cannot be sustained,” explained Pong, adding that while the PBOC may have the largest war chest of foreign funds, the amount remains finite, and would be hard to replenish.
Pong then pointed out that, when Malaysia was faced with this scenario, Bank Negara had let the ringgit fall instead of trying to bolster the currency, allowing the national bank to preserve the country’s hard-earned foreign reserves.
Yeah noted that China is now facing a recession, with a slower growth projected at between 5% and 6%, despite official channels still being hopeful for 7% growth.
“The 5% to 6% growth is what we would call a ‘soft landing’ for China. If China makes this soft landing, the impact of the slowdown on the Malaysian economy would not be as great, and can be offset by exporting to other markets like the US, Europe, and Japan,” said Yeah, adding that boosting intra-Asian trade would help as well, as intra-Asian trade makes up between 40% and 50% of local trade.
Yeah also noted that the Malaysian market is also hinging on the Budget 2016 revision, to be tabled on Feb 28, is necessitated by the lower prices of oil as well.
“The revision will need to pare down on places without too much of an impact to the economy,” said Yeah, noting that delays could be seen with government projects to ensure the fiscal deficit does not widen too sharply, for if the gap should widen too much, the market would be destabilised.
“If it (the fiscal deficit) widens too much, it would show that the control on spending is not adjusted enough to show fiscal prudence. The government needs to look to new sources of revenue other than the goods and services tax and the petroleum tax, as well as improve the efficiency of government spending and reducing wastage, to be able to achieve the deficit target despite the sharp drop in oil prices,” said Yeah.
He noted that the government would need to cut between RM5 billion and RM6 billion in expenditure, which he believes should still be manageable without too much impact to the economy.
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