Malaysia: Hot Rush Hour

I took this from an article by Yow Hong Chieh in The Malaysian Insider as it will give you viewpoints of this current hot issue.

"Kuala Lumpur, April 30-

Any attempt by Malaysia to impose capital controls to stem the current inflow of hot capital will be viewed negatively by the market, say analysts and economists.

Their warning came after the possibility of hot money pouring into the country as a fiscal crisis grips several Western countries including Greece which is unable to resolve its problems, even with European Union and International Monetary Fund support.

In the last few days, Greece Spain and Portugal have all been downgraded by Standard & Poor’s, the credit ratings agency.

Maybank Investment’s Suhaimi Ilias said any capital controls would be “counter-productive” although governments and central banks in the region want a more balanced flow of capital between short-and long-term investments.

“I would be surprised if there was any form of capital controls emerging,” he told The Malaysian Insider.

“There’s a concern about hot money essentially and how to manage this to make sure that our economy, while growing, won’t create inflation risk.”

He said the main concern was most likely due to the glut of “cheap money” externally due to the low interest rates in more developed economies like the US.

Suhaimi also identified the anticipated yuan exchange policy change as a reason for increased proxy investments in regional assets.

“There might [also] be some outflow from Thailand looking for more defensive markets. I think Malaysia is benefitting from that.”

However, he warned that capital controls would make Malaysian assets less attractive to foreign investors.

“In an environment where it’s already very competitive to get capital, to adopt such a policy, as far as investment is concerned, [represents] a negative aspect.”

Suhaimi added that there were better options available to achieve “sustained rather than punctuated” capital inflows, citing market-based instruments.

“When you apply market-based instruments it can also contribute to the development of the financial market. There are a lot of benefits that come with it.”

He said the ringgit position as the best regional performing currency has not been seen for a long time, and cited this as an example of “letting the market do its work”.

Another economist, who did not want to be named, said he believed most Asian governments would not introduce strict capital controls.

“Based on our past experience from the Asian financial crisis, we know that capital controls... can be viewed as negative even in the long run,” he said.

“My personal view is that the problem is very similar to the early ‘90s where we saw a huge influx of hot money flowing into the emerging economies.

“I guess the risk [is that] the major industrialised countries will start to increase their interest rate… and then we’ll see outflow.”

While he viewed the recommendations issued by Standard Chartered on Monday to “adopt greater currency flexibility and broaden and deepen capital markets” positively, he said such changes could not take place overnight.

The report said that many emerging market economies, having recovered faster than the West, are on the receiving end of a surge in capital and liquidity that include bank lending, direct and portfolio investment and hot money.

“It takes time to develop... One cannot just transform the economy and the capital market in such a short span of time.”

Economist Zainal Aznam Yusof downplayed the issue of capital inflows and said it was “a manageable kind of situation”.

He explained that such movement of capital always happens when there are signs of recovery.

“We should not be excessively worried about that... We have to allow the exchange rate in Malaysia to react.”

He added that he expected the exchange rate to strengthen some more.

“The question is by how much.”

Zainal said instability in Thailand was probably a minor source of hot capital flowing into the country, reasoning that investors were already familiar with the country’s political landscape.

“The Thailand [political situation] has been persisting for a long time so we shouldn’t exaggerate the Thai factor.”

Lee Heng Guie, of CIMB Investment Bank, said that while it was a challenge for Asia to deal with the flood of cheap liquidity into the region, he believed that Malaysia was not experiencing such an influx.

“I don’t think we see this surging of this hot money into Malaysia at the moment.”

He added that Malaysia had a diversified asset class to absorb the current level of capital inflows, which were not big enough to warrant controls.

However, Lee warned that countries that are unable to stem the tide of short-term capital flows may experience some instability when the flow reverses.

“The IMF even suggested that some countries may think of selective capital controls to deal with these inflows of hot money.”

Malaysia: Civil Litigation Rears its Head

Well, we have become a litigators' country,haven't we?.

With so many civil suits and counter suits,what may become of us poor folks? Is money the driver behind all the civil suits that have been filed lately?

I remembered at one time, the former PM of Malaysia did want to cap civil litigation awards only at RM10,000. I wonder what happened since so many litigants have been awarded RM10 million even on those who have died.

Lately we have heard again about these suits.

The one that was pretty interesting was when the current MB of Selangor won against Bank Islam.

Now, we have the ones involving Zaid Ibrahim. He is filing civil suits against the Election Commission for helping BN steal the Hulu Selangor Elections as well as a suit against Utusan Melayu for defaming him as an alcoholic. The latter is interesting as he is only seeking damages of  a token Ringgit Malaysia.

And let us not forget Ibrahim Ali's suit against The Sun newspaper for purportedly painting him as a racist.

Quo vadis, Malaysia?

BNM: May Revise up wards 2010 GDP for Malaysia

Well,what do you know. After JP Morgan and HSBC, even Zeti of  Bank Negara Malaysia (BNM)has jumped on the bandwagon to swear that the Malaysian economy has indeed seen good growth  so far in 2010. As such BNM  may revise up its economic growth forecast for 2010 due to this so called "continued improvement in the economy".

She has this to say. "We have realised there’s potential for an upward revision. The review could be done in the middle of this year where the figures could be used in the budget.”

BNM has previously said the economy could expand at between 4.5 to 5.5 per cent this year.

Genting Moves up Despite Competition from Marina Bay Sands

This is interesting.

Despite the opening of the second casino, the crowd at Resorts World Sentosa seems usual. There was no sudden drop.

Let us read this Reuters report.

As such, the benchmark Straits Times Index was 0.56 per cent higher as of 0310 GMT today.

Shares of Genting Singapore rose as much as 9.2 per cent to 94.5 Singapore cents, two days after rival operator Las Vegas Sands opened the city-state’s second casino.

“Some people have observed that for the past couple of days, the crowd at Genting was still brisk,” a trader with a local brokerage said.

CIMB also upgraded Genting Singapore to “outperform” and maintained its target price of S$1.23.

“We believe that both properties have different propositions, reaching out to different market segments,” CIMB said in a report.

“RWS (Resorts World at Sentosa) will appeal to the family-oriented gamblers while MBS (Marina Bay Sands), with its extensive retail and MICE facilities and CBD location, is well position to capture a slice of business travellers”.

Around 0310 GMT, Genting Singapore was up 8.1 per cent at 93.5 Singapore cents with over 213 million shares changing hands.

Property: 2010 will be a A Better Year

This Bernama Report indicates that the Malaysian property market will see better prospects in the current year.

"The property market this year will perform better than in 2009 due to an improvement in the general economy, Deputy Finance Minister Datuk Dr Awang Adek Hussin said today.

As to whether, normalisation of the overnight policy rate (OPR) by Bank Negara Malaysia would affect it, he said: “Bank Negara may normalise the rate, but I think, not to the extent of impacting adversely the property market”.


Awang Adek pointed out a marginal drop of 0.7 per cent of the total volume of transactions last year, while the total value reduced at a higher rate of 8.3 per cent.

He said a strong banking system will also help boost the property market, especially the residential segment, while stimulus spending supports the non-residential sub-sector.

On the construction side, Awang Adek said there would be ample office space in the market for the next couple of years, as indicated by the available space of 11.8 million-sq-m in the country.

On the RM67 billion stimulus package, he said spending for the first package, was virtually completed and for the second, it was well underway.

Meanwhile, commenting further on the property market’s performance, Abdullah Thalith of INSPENS said it was the right time for BNM to increase the OPR to curb speculation elements.

Pork Barrel Politics Won!

Whichever party won in Hulu Selangor does not matter now.

We have seen the best in campaigning and we have seen the worse.

We have seen cash hand-outs; we have seen other form of near-cash handouts.

We have seen election offences done in plain sight with little action done to curb them.

Who won? Pork barrel politics and the recipients.

My regards to Kamalanathan who pipped Zaid and to the people of Hulu Selangor who had most of their governmental problems solved within a fortnight.

Huray! This is sheer magic.

The Ringgit Draw on the Stock Market

What does a strengthening ringgit do to our stock market?

TA Securities analyst Stephen Soo explains a firm ringgit is a boost to the stock market as it encourages fund inflows.

Although he sees bonds as the main beneficiary of a stronger ringgit, with equities next, he is more bullish on equities for the second half of the year, on the back of the tabling of the 10th Malaysian Plan and the release of more details on the New Economic Model.

“In the last two years, Malaysia has experienced a net outflow of foreign direct investments (FDIs). As the ringgit strengthens, this will at least stop some of the outflows and support liquidity flows. This liquidity will need to go somewhere and stocks will benefit,” says Soo.

Bank Negara data points to an FDI reversal in 2007, with net outflows of direct investments of RM9.14bil. This increased to RM26.06bil in 2008 and to RM14.62bil in the first nine months of last year.
Portfolio investments in Malaysia booked a net inflow of RM8.8bil in the third quarter of 2009 after four quarters of significant outflows.

JF Apex Securities Bhd CEO Lim Teck Seng feels that the recent inflow of funds have not had much impact on the stock market as most of the foreign inflows were for fixed income and not equities.

“A strong currency may not favour stock markets as theoretically, Malaysian stocks have become more expensive. For the moment, foreign funds prefer to enjoy yields rather than the riskier returns from equities,” he says.

Private equity banker Sherilyn Foong says portfolio inflows seem to be faster and nimbler than FDIs. “We’re coming from a low base on the bonds front. My main concern would be if it is, to a significant extent, hot money,” she says.

MCIS Zurich Insurance Bhd head of fixed income Michael Chang shares Lim’s views. “Buying government bonds is probably one of the easiest ways if I am expecting the country’s currency to rise,” he says.

“The risk is deemed moderate and bonds are also fairly liquid investments. Offshore investors can buy into the Malaysian Government Securities (MGS) as it is as good as buying the Malaysian currency,” says Chang.

Long-term hazard

While most people are of the view that a rising currency signals more investments flowing into the country, and therefore contributing to a rising stock market, this is a mere correlation and not a direct impact.

Past studies by ABN Amro Bank and the London Business School have shown that strong currencies do not lead to generous profits from the equity markets.

According to the research, countries with weak currencies saw greater stock returns than ones with strengthening currencies.

A broker from a local house says that a strong currency only offers short term benefit for the market. “Over the longer term, it is not good for an exporting economy and for the stock market,” he says.

Investing in stocks can be viewed as risky compared with other assets. When the central bank raises interest rates, government securities such as the MGS are often regarded as the safest investments and will usually experience a corresponding increase in interest rates.

In other words, the risk-free rate of return goes up, making these investments more desirable and a lot safer than stocks. With stocks, one has to factor in the risk premium as well.

The ringgit has strengthened some 7% to 3.2015 against the US dollar since the beginning of this year. This will impact the earnings of Malaysian exporters and various other sectors of the economy.

Over the short term, exporters such as those in the rubber glove, technology, and electrical and electronics sectors may suffer setbacks.

Says OSK Research director and research head Chris Eng: “A stronger ringgit is better for the country as long as it strengthens gradually. Lately, the ringgit has strengthened rather quickly and this may not give exporters time to pass on (additional) costs to their customers.”

Winners and losers

Rubber glove stocks have come under selling pressure of late as investors worry about a repeat of the share price collapse in 2008, when investors assumed that record latex prices, high energy prices and a weakening US dollar would dampen glovemakers’ earnings significantly.

Those who remain bullish about the industry contend that the demand for rubber gloves is resilient and that the listed manufacturers, because they are market leaders, will be able to hike selling prices to absorb cost increases.

A stronger ringgit means imports tend to cost less. Manufacturers that rely significantly on imported raw materials stand to benefit and will likely see their margins improve, provided their output is largely sold in the domestic market.

With the US dollar weakening against the ringgit, commodities such as oil and gold, which are bought and sold in US dollars, will be cheaper for purchasers in Malaysia.

Eng says in this context, the local airlines are beneficiaries, as fuel is denominated in US dollars while sales are mostly in ringgit.

“In Malaysia Airlines Bhd’s case, their revenue is mostly derived in Australian and Asian currencies. So they benefit from the strengthening ringgit,” he says.

Others gaining from the surging ringgit include automotive and food-based companies that import products in US dollars but sell them to Malaysian buyers. Companies that have large foreign debts – Tenaga Nasional Bhd for example – will also benefit. On the flip side, MISC Bhd, whose revenue is mostly in US dollars, may be at a disadvantage.

Profit impact

Eng says a stronger ringgit helps control inflation, hence strengthening domestic consumption.
One line of argument is that a strong currency also means that imported raw materials are cheaper, thus lowering inventory cost. This leads to lower borrowing obligations and hence less interest to pay.

Says a senior analyst: “The price of the finished good also goes down and this leads to a lower cost of living. The strength of a currency is an indicator of economic health.”

According to the Big Mac index, the ringgit is 40% below its fair-value benchmark with the US dollar as at March 16 (at 3.3245 per US dollar).

The Big Mac index is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries.

“Based on a trade-weighted index, the ringgit should be fairly valued at 3.23 per US dollar, which is almost close to the current level,” says AmResearch senior economist Manokaran Mottain.

He is forecasting exports to grow by some 7% to 8% and Malaysia’s gross domestic product to hit 5% this year.

Says Chang: “While some exporters lament the stronger currency, a lot of them are importers too and their costs of production have fallen. The most substantial profits are often made in finished goods, not in raw materials.

“Profits made from finished goods are more sustainable as it gives better margins on a longer-term basis. It allow us to move up the value chain.”

An observer says that while raw materials may be cheaper due to the strengthening ringgit, Malaysian exporters will still be in the losing end when selling finished goods to the global market as their products will be denominated in US dollars.