The old mantra that if US sneezed, we would catch a cold. Now, many economists, analysts, and market watchers argue that was then. They see
As we were assured last year, our economy would not suffer much from problems in the
Last week, I was attending a talk by Prof. Nolbert Walter, chief economist of Deutsche Bank, who argues that the bear market would not last possibly until 1Q09. Comparing the experience of the bear market of 2000/01 might not be something that is extremely to ponder about.
To be blunt, I wouldn’t want to stand in front of a bear market train. To suggest consumer spending is slowing is a kind word, but I am suggesting that consumer spending will be slower to rebound, as many still not fully digesting the impact of the potential spending cut in favour of higher savings. Earnings are continuously under pressure and earnings are what drive the stock market in medium and long term.
I think market is going to test a new low and then to watch market go lower as the market gets disappointed in the earnings from the 3Q08 onwards. We are in for an extended period of muddle through, while we wait from the global housing market to find bottom and the credit crisis to abate.
The world economy is having a simultaneous recession and in many of them elevated inflation as well. The Bank of England is forecasting a zero percent GDP over the next year with an inflation of 5%. Real GDP declined 0.6% in the 2Q in
By the time, until the back to back negative growth seen in the early 1990s, guess what, the Nikkei had already plunged 50%, the 10 year and the JGB yield rallied 300 basis points.
In short, we are not decoupled, instead is more closely intertwined due to rising global financial integration. Until a full functioning banking system is back to operation, it would not be too hard to argue for a secular bear. The best ever investment advice for everyone is to look for absolute return types of investing.
2 comments:
The credit crunch event in mid-March probably marked a peak in the financial
firestorm in the United States, courtesy of unprecedented Fed actions to provide
support to financial markets and to a broad range of financial institutions. Now
comes the economic fallout – the US economic recession.
The lagging effects of credit crunch are slowly reflected in US economic activities
and growth abroad is beginning to slow as well. Locally, apart from the lag effect
of a US fallout, the Malaysian economy is facing the risk of high inflation,
strengthening of Ringgit, a potential economic slowdown and political uncertainty.
All this will put the pressure on loan growth, which we believe is now skewing
downwards. The April 08 loan growth of 10.1% might not be reflective of the true
outlook of the Malaysian banking sector over the next 6-12 months. Read our
argument below as we analyze the whole picture from global inflation to economic
fallout.
The ongoing rise in global inflation represents a major and serious threat to
Malaysia economic growth. For the first time since 1997, Malaysia will have no
choice but to leave the inflation elevated. The ingredients: soaring energy, food
and commodity prices, and rising inflation expectations. As a result, Malaysia’s
headline inflation should rise above the April 08 CPI of 3% in the remaining
months of the year.
These developments also point to downside risks to discretionary income of
consumers and the growth. Indeed, the resulting loss in discretionary income will
only be seen from 2nd half of the year (probably after the petrol hike). We believe
that the rise in energy prices between 2007 and 2008 have eaten into consumers
discretionary income, while recent price hikes in food – a much bigger share of
consumer budgets – will further drain the wherewithal. The drain from higher
energy and food quotes implies a weaker net income trajectory for consumer
spending that will hold back economic growth. The same will happen to the loan
growth.
The long-resilient consumers have played a central role in shaping the country’s
economy. However, consumers are now facing the strongest economic headwinds
since Asian 97 crisis, and we have counted the forces to add up to a storm for the
consumers. Among them: higher energy and food quotes. Will consumers
buckle? As we see it, outright retribution is a clear risk but we think consumers
will narrowly skirt a downturn with a slowdown in the overall economy. The
bigger story is that consumers will likely suffer a longer period of slow growth
with the economic downturn predicted to happen in the 2nd half of the year.
The corporate story is the analytics of margins: In my view, the combination of
slower growth and high operating and financial leverage would lead to contraction
in earnings unavoidable. Lower profit margin but higher fixed will increase
operating leverage. Corporations that are able to exploit that leverage would see
earnings propelled to record levels. Strong increments to revenue would go
straight to bottom line. Financing the boom with debt and buying back stock
increases financial leverage and, of course, raise earnings per share.
But leverage —operating and financial— works both ways. Slower growth means
that operating leverage is working in reverse, with decrease in revenue going right
to bottom line as well. Not only that means slower top-line growth, but also the
loss of pricing power would directly affect bottom line. Thus, rising costs for
energy, materials, commodities, and imported goods are no longer being passed
through via higher prices but instead pressuring margins. Moreover, higher
financial leverage boost debt service in relation to cash flow, and now investors
demand higher premiums to take on escalating credit risks, squeezing profit
margin further.
Finally, overseas growth is beginning to soften. Business discussion, production,
and retailing results are starting to turn down in Malaysia. During the 1Q08 result
season, we see margin squeeze from increasing raw material prices and transaction
loss due to strengthening Ringgit. And rising inflation means central banks could
not or would not respond to these threats to growth. Just as strong consumer
spending helped keep the Malaysian economy growing over the past year, a
potentially weaker consumer spending ahead is likely to lead to a slower economic
growth, which we think is now underway. Hence, we do not foresee any
interesting driver for loan growth with capital spending is now under
pressure, and the consumer confidence is fading. We are quite clear that the
risk is now skewing towards the downside. Some banks have shown signs of
moderating loan growth at the 1Q reporting season, namely, EON Capital with
1.9% and RHB Capital with 2.6%. The banks’ loan growth underpins
management’s FY08 target of 8-10% and we believe it should continue to be so
for the remaining of the year.
We are turning more cautious for 2H2008 due to: 1) increasing macroeconomic
headwinds from global slowdown; (2) still healthy loan growth, but increasing
caution on consumer-related exposure, namely hire purchase and mortgages. We
see mid single digit growth likely for the year; (3) profit margin squeeze can
indirectly trigger wave of loan defaults in late 2008 or early 2009; (4) banks’ concerns that narrowing lending spreads can reduce margin further; (5) reduction
in Malaysian fuel subsidies that will raise inflation and interest rates.
excerpt fr TA's Banking report dated 29May2008 titled 'Challenging Times'
China now Japan's biggest market
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