Friday, February 27, 2009

Economic Indicators vs Stock Market

When the economy slows down and the market is on a downward trend, it is not necessarily bad as this could be a golden opportunity to spot some good stocks at a bargain .

IF YOU have been following the news on a daily basis, you surely would have heard the repeated news on the fall of the US and European markets that are currently spreading gloom across the globe.

With the risk of global recession on the increase, global stock markets are not left unscathed by the predicament the world's economic giants are in. Stock markets worldwide are left to face strong selling pressures that are wiping out their asset values.

As a result, you might be wondering whether your portfolio (albeit confined to the local business environment) is strong enough to weather the adverse external shocks that are causing jitters in markets across the globe.

Why do you need to understand and monitor the economic situation?
A company's earnings and future prospects depend largely on the overall business and economic climate. No matter how strong a company's fundamental is, if the economy is down, the performance of a company will inevitably be affected somewhat. Cyclical stocks will probably face a larger impact compared to non-cyclical or defensive stocks.

Meanwhile, the stronger companies will be able to weather the harsh economic situation better than the weaker or less well managed ones.

Therefore, as an investor, it is important for you to understand the macro picture of the economy, not just the sector/industries or stock/company that you are interested in investing in.

What is an economic indicator
An economic indicator is in simple terms, the official statistical data of a certain economic factor that are published periodically by the government agencies, which an investor can use to gauge the economic situation. It allows investors to analyze the past and current situation and to project the future prospects of the economy.

There are three basic indicators that matter to investors in the stock market, namely inflation, gross domestic product (GDP) and the labour market.

* Inflation
Inflation is important for all investments, simply because it determines the real rate of return that you get from your investment. For instance, if the inflation rate is 5 per cent and the nominal return is 8 per cent, this means that your real rate of return is 3 per cent as the 5 per cent has been eaten by inflation.

Inflation's impact on the stock market is even more complicated. A company's profit will be affected by higher inflation. Its input cost will increase and the impact of the increase will depend on how much of the incremental cost the company is able to pass on to its consumers. The amount that the company will have to absorb will reduce its profits, assuming all else being equal.

The stock market will suffer further negative impact if it is accompanied by increased interest rates as the bond market is seen as a cheaper investment vehicle compared to stocks. When this happens, investors will sell off their stocks to invest in bonds instead.

The most commonly used indicator for the measurement of inflation is consumer price index (CPI). It consists of a basket of goods and services commonly purchased by consumers, such as food, housing, clothes, transportation, medical care and entertainment.

The total value of this basket of goods and services will be compared with the value of the previous year and the percentage increase will be the inflation rate.

On the other hand, where the value drops, it will be a deflation rate. A steady or decreasing trend will be favourable to the overall stock market performance.

* Gross Domestic Product
Another important indicator is the GDP measurement. It is the total value of goods and services produced in a country during the period being measured. When compared to the previous year's reading, the difference between these two readings indicates whether a country's economy is growing or contracting. GDP is usually published quarterly.

When the GDP is positive, the overall stock market will react positively as there will be a boost in investor confidence, encouraging them to invest more in the stock market. This will in turn boost the performances of companies.

When the GDP contracts, consumers tread cautiously and reduce their spending. This in turn will affect the performance of companies negatively, thus exerting more downward pressure on the stock market.

* Labour market
The unemployment rate as a percentage of the total labour force will basically indicate the country's economic state. During an economic meltdown, most companies will either freeze hiring or in more severe cases downsize, by cutting costs and reducing capacity. When this happens, the unemployment rate will increase, which in turn, creates a negative impact on market sentiment.

Bottom line
By understanding the economic indicators, you should be able to gauge the current state of economy and more importantly, the direction in which its headed. Pooling this knowledge together with the detailed research on the companies that you are interested in, you should be well equipped to make sound investment decisions.

Bear in mind that when the economy slows down and the market is on a downward trend, it is not necessarily bad as this could be your golden opportunity to spot some good stocks at a bargain that are worth buying.

Malaysia's economic indicator data can be obtained from the Department of Statistics website at

Monday, February 16, 2009

Challenging Year Ahead For Malaysia

Trade figures showing sharp downtrendTHE country’s latest trade figures announced last week have brought closer to home the reality that the current economic downturn could be more severe than anticipated.

December exports fell 14.9% year-on-year, the biggest slide since September 2001, while imports fell 23.1%, the biggest since August 2001.

This has raised concerns that the decline in global demand in the coming months may be more severe and will weigh on the country’s gross domestic product (GDP) growth.

Kenanga Research, in a recent note, has revised its GDP forecast to 0.6% for 2009 from 3.3% while the average GDP growth for 2008 may edge closer to 5%.

AmResearch estimates GDP growth of 4.9% in 2008 and a contraction of around 0.5% in 2009.
Earlier in the year, Bank Negara also slashed its overnight policy rate (OPR) by 75 basis points to 2.5%, the single largest cut since it was introduced in April 2004, outlining its growing concern over economic growth.

The statutory reserve requirement was also reduced from 3.5% to 2%.

RAM Holdings Bhd group chief economist Dr Yeah Kim Leng sees a very challenging first half as industries and companies seek to weather the export slump and knock-on effects of cutback in consumer spending and business investment.

“We are expecting a spike in the number of individuals and companies experiencing financial distress, but the scale and spread will be manageable given the underlying strength of the banking sector.

“It will also be smaller than that of our last recession in 1998 as most large firms are generally healthy going into this economic slowdown,” he told StarBiz.

His initial growth forecast of 3.6% this year will be more than halved due to the deepening global downturn.

One of the main casualties of the global economic downturn is the electrical and electronics (E&E) sector with the Semiconductor Industry Association recording a 16.7% drop in global demand for semiconductors in December.

Malaysian-American Electronics Industry chairman Datuk Wong Siew Hai said sales for most local E&E companies had slumped by 50%, with some companies reporting an 80% drop.

“If the downturn is stronger than expected, I foresee more retrenchment in the second half of the year as companies have already cut costs and will have to adjust their human resource capacity to meet demand,” he added.

Wong noted that companies might have to branch out of their core business to do something else to help them gain revenue until their core business demand returned.

“To mitigate a decline in demand, the only thing to do is to save costs. Don’t waste, be lean and be willing to work hard and be flexible to meet customers’ demand.

“Most companies are already working shorter weeks and have no increase in salary, while some have even started pay cuts,” he said.

Reduced consumer spending has also affected the retail sector in terms of sales and profitability.

Retail Group Malaysia managing director Tan Hai Hsin sees bad times for retailers, at least until the second quarter of the year with the end of the annual festivities and lower consumer spending due to more retrenchments and reduced take-home pay.

“From the sales perspective, retailers need to continue to use deep discounts and exciting promotions to attract shoppers to buy.

“On the operations side, retailers need to be careful in terms of purchasing and daily operational expenditure. The retail business is considered labour intensive, thus savings via job cuts should not take place,” he said, adding that there were no expectations of major closures of retail stores in the country.

Things are also not looking too bright for the motor vehicle industry. This year’s forecast car sales have been revised downward by the Malaysian Automotive Association (MAA) to 480,000 units, a 12.4% drop versus last year.

President Datuk Aishah Ahmad said motor players had yet to know the actual sales impact.

Profitability will also be affected this year as most foreign currencies had appreciated against the ringgit, especially the yen and US dollar.

Aishah said most motor companies had already implemented cost-saving measures, were monitoring expenses and cutting back on capital expenditure which could be deferred.

“Head count has also been frozen with no new recruitment. New orders with principals are also closely monitored to ensure stocks do not creep up.

“So far no voluntary separation schemes (VSS) have been implemented. If the downturn is longer than expected, then the motor companies may need to trim costs further before resorting to VSS,” she said, adding that many car companies were also offering a lot of incentives to improve their sales performance.

The waste management industry has not been spared, with Tex Cycle Technology (M) Bhd’s sales falling 20% since December.

Managing director S. Perry has resorted to having dialogues with staff on the importance of cost cutting.

“We do not have unnecessary overtime for our workers.

“We will only resort to retrenchment as a last resort. Fortunately, at the moment, we are still doing all right,” he said.

To boost business, TM Asia Life (M) Bhd will be venturing into bancassurance to diversify its distribution channel and strengthen its brand name with a reputable partner in the financial industry.

“We will continue to spend on projects and research and development to improve our processes and services to support our long-term plans to increase market share,” said deputy chief executive officer Jun Tokura.

He is confident the company will be able to weather even a stronger economic downturn as the industry is recession-proof and has proven track record in withstanding numerous economic downturns in the past.