Wednesday, August 20, 2014

Malaysia’s Growth Is Sustainable And Real

THE Malaysian economy stands defiantly as the outlier in the region, remarked an economist in reference to how the market underestimated the strength in economic activities in the second quarter.

Both Thailand and Singapore averted recession in the second quarter (Q2), while Indonesia’s performance for the period showed the slowest in five years. 

The growth engines of many regions have stalled, namely the eurozone, an important trading partner of ours, although it has been encouraging to note that the United States has recovered. 

Malaysia’s strong 6.4 per cent growth in Q2 after recording 6.2 per cent in the first quarter will ease the mind of any doubters that the growth is sustainable and real. 

The economy has put up a solid growth number that is neither influenced by base effect or prices of export and commodities, which have been flat or trending down in Q2. Underscoring the strength of growth is exports, which have been accelerating since the third quarter of last year. 

And now with the strong showing in Q2 and the steady growth path going forward comes the dilemma, as put by another economist. 

Will the central bank continue with its hiking cycle in raising borrowing costs? 

If so, it will be anyone’s guess whether it will take place on September 18 or November 6. It will be a close call. 

Market watchers have studied Bank Negara Malaysia’s patterns in its monetary policy and one common trend they find is that there will be two consecutive hikes to normalise monetary conditions before it decides to stand pat. 

Nevertheless, an additional 25 basis points hike would bring the key benchmark interest rate to 3.50 per cent and that would complete the central bank’s normalisation process and with it, raise the real interest rates to the positive territory. 

Generally, two to three months is the measurement used as a lag period to measure the impact of any measure. 

Likewise, the impact of the hike in Overnight Policy Rate on July 10 is being carefully watched by the central bank officials — change in spending patterns of consumers and businesses as well as loan growth. 

Then financial imbalance was looked as a grave concern and that looks less worrying over the past few quarters. Our household debt level, which was one of the highest in the region, looks contained, especially now that the gross domestic product base has expanded. 

Those who favoured a tightening in the monetary policy this year argue that next year may not be ideal, considering the Goods and Services Tax (GST) would be rolled out, and not forgetting that the United States Federal Reserve, in all likelihood, would also raise the interest rate. 

The argument for the hike to come about in 2015, which some sections of the market hold is that we have a fairly benign inflation level, and hence the current 3.25 per cent is supportive of growth. 

However, a trigger could come when the GST is implemented as the inflation would spike and go beyond the central bank’s comfortable range of two to three per cent. 

Bank Negara has warned that the overall balance of risks for the global economy remains biased towards the downside, what with the uncertainty over policy adjustments and geopolitical tensions, which will drive volatility in the financial markets. 

But the monetary policy is not the only tool in the kit box, as Tan Sri Dr Zeti Akhtar Aziz, one of the most senior central bank chiefs in the world, often reminds the media. 

Macro and micro prudential measures are always there for the central bank to turn to. 

Instead of pinching the purses of the households, Bank Negara could raise the Statutory Reserve Requirement ratio, which is used to check on the liquidity level in the banking system. The last time it did so was in July 2011, when it was raised to four per cent. 

In all, the next two to three months will be eventful for the market. 

Apart from the Monetary Policy Committee meeting on September 18, there is the possible fuel revamp as part of the subsidy rationalisation programme. 

Come October, there is the 2015 Budget, an event that also brings with it policy adjustments. 

With the economy firing on all cylinders, market watchers will continue to be baffled with our performance for the rest of 2014. But they will also want to see if we can prove our fiscal discipline by reining in domestic debt.


Monday, August 04, 2014

Too Early To Worry About Correction

WALL Street’s worst week in two years was enough to get investors worried about whether a long-overdue correction is coming, but analysts are still leaning bullish. 

The S&P 500 ended the week down 2.7 per cent, its biggest weekly loss since June 2012, a decline that had followed several weeks of selling. 

The market is undoubtedly ripe for a correction — the current rally has continued for nearly three years without a decline of more than 10 per cent. 

The United States Federal Reserve looks closer to raising rates, and housing and auto sales figures suggest those markets may be softening, if only temporarily. 

“The summer has been just tough because there has been very little to buy,” said Kathleen Gaffney, portfolio manager of the Eaton Vance Bond Fund. 

“But I think what is happening is we are seeing the markets adjusting from an environment of lower interest rates to higher interest rates — and that’s producing volatility.” 

The Fed’s monetary policy has been favourable for the markets, and though it is expected to begin raising rates next year, the absence of wage pressures has kept moves in Treasuries yields relatively muted. 

While the spread between long- and short-dated Treasuries has narrowed of late, which tends to happen as the economy slows, the difference between the two-year and 10-year Treasury notes is more than two percentage points — still a favourable sign for economic growth. 

On Wednesday, the Fed gave a rosier assessment of the US economy while reaffirming that it is in no hurry to raise interest rates. 

The US central bank also, as expected, reduced its monthly asset purchases to US$25 billion (RM80.28 billion) from US$35 billion. 

Although government data on Friday showed US job growth slowed last month and the unemployment rate unexpectedly rose, recent economic data has been largely positive with growth in second-quarter gross domestic product at four per cent and favourable revisions to first-quarter gross domestic product. 

The CBOE Volatility index, Wall Street’s so-called fear gauge, jumped to 17.03 from 12.69 after Portugal’s Banco Espirito Santo reported an unexpectedly large loss for the first six months of the year that raised concerns about the bank’s solvency and after US employment cost pressures came in higher than anticipated. 

But the VIX remains well under the long-term average of about 20, and stock valuations remain reasonable. 

The S&P 500 is trading at an average price-to-expected earnings ratio of 15.4, which is not very stretched relative to the historical average of around 14.1. 

“The economic environment remains healthy. As such, volatility should decline and stocks should rebound,” said Jonathan Golub, chief US market strategist at RBC Capital Markets. 

Even so, the fact that the benchmark S&P 500 hasn’t been able to crack the 2,000 milestone, despite a few approaches, suggests some exhaustion is setting in.