The US sub-prime crisis sparked off a crisis of confidence among financial institutions globally, which led to an erosion of consumer sentiment as well as business confidence. The situation rapidly worsened with a sharp slowdown in global economic growth seen for 2009. The IMF now forecasts a global GDP growth of only 2.2% in 2009, with all G3 economies facing a simultaneous recession, the first since the Great Depression. The stimulus packages announced so far will only help to cushion the inevitable fall.
East Asian economies will be relatively more resilient given their higher levels of foreign reserves, trade surpluses and room for monetary policy manoeuvring. China is still forecast to record a 7% to 8% GDP growth for 2009, with East Asian economies as a group expected to record 7.1% growth. China has shown that it is willing to take necessary steps such as cutting interest rates and announcing a US$586bn stimulus package which is equivalent to some 18% of its annual GDP. As long as there are no more major scandals, domestic pump priming activities in China may help to cut short everyone else’s pain.
Malaysia will not be spared from the impending economic crisis. Demand for the country’s electronic exports will slump as slowing global growth and the sharp drop in commodity prices will crimp the Government’s revenue. Nonetheless, it will not be a repeat of 1998 as our financial system is in a much better state of health with NPLs at 2.4% and loans to deposit ratio below 76%. We are still forecasting a GDP growth rate of 2.7% for Malaysia.
The stock market is likely to do poorly in 1H as more bad news emerge on the economic front. The 4Q financial results to be released by listed domestic players in the month of February should also be poor as a combination of a drop in commodity prices and demand for goods and services impact on profits.
Nonetheless, the 2H may see a market recovery as the global economy may recover in 2010 and the stock market tends to trade ahead of the real economy. Aside from China, quick action by governments around the world in mobilizing stimulus packages may just be enough to ease the pain. We also see commodity prices stabilising as the US dollar weakens once deleveraging in the emerging markets comes to an end. While the Malaysian market is not cheap on a regional basis, it is cheap on a historical basis, trading some 2 standard deviations below the 8-year mean. Given its defensive nature, we see interest trickling back once news flow improves. We remain overweight on defensive sectors such as Gaming, Rubber Gloves, Consumer – Food and Utilities while for the Steel sector, we see value in stocks that have been sold down once commodity prices stabilise.
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Important Note
