Has The Dust Settled?

Asian stock markets have largely recovered on the first trading day of the week, despite Wall Street's second consecutive day slump last Friday. This could well be a sign that Asian markets have discounted the potential impact of US subprime woes on global economies particularly Asia, given the robust economic growth outlook of most major Asian countries led by powerhouse China and India. In fact, Asian economies efforts in undergoing a deliberate structural shift to reduce dependence on external markets and to make domestic demand a key growth driver may begin to bear some fruits, as intra-regional trades and domestically driven demand increase.

As a matter of fact, some analysts started to impose the view that recent market corrections were healthy for the general market performance, as most Asian stock markets had achieved historical highs. Such corrections are certainly good to recharge some batteries and provide great opportunity for investors to accumulate valued stocks on weakness.

For Malaysian stock market, again the index holds up quite well yesterday. This is partly due to the announcement of the setting up of another special economic region this time in the north region of Peninsula Malaysia. This is a USD51.2 billion (RM177billion) project codenamed Northern Corridor Economic Region (NCER), covering the states of Perlis, Kedah, Penang and Perak. More details on NCER later.

A Worrying Sign

On Thursday, Wall Street sank as much as 448 points before bouncing back somewhat, ending with a loss of 2.26% on the back of concerns that the US sub-prime mortgage crisis could have a larger impact on other markets worldwide than previously thought. Data showed sales of new homes dropped 6.6% in June. Over the past one year, sales of new homes plunged 22.3%.
There were concerns that the faltering US housing sector will hurt banks and finance companies enough to curb the availability of credit on which the economy feeds. That, in turn, could impact on private equity groups because their takeover bids are often financed by large amounts of bank debt. For instance, Britain's Cadbury Schweppes said Friday reported that it has been forced to extend the timetable for the sale of Americas Beverages due to the recent extreme volatility in debt markets. Some analysts believe that Cadbury may have to sell Americas Beverages for 7.0 billion pounds (USD14.25 billion), instead of the 8.0 billion which investors had anticipated.

Global stock markets were rocked by Dow's huge fall yesterday. Major stock markets across Asia, with the exception of China, fell heavily with the highest 4.22% recorded by Taiwan,
followed by South Korea (4.09%)! Malaysia KLCI, surprisingly held up quite well, falling by only 1.89%. This seems to indicate that Malaysia's stock market is still in a bullish tone, unless Dow's problem persists.

The big question mark is how should investors react to such adverse condition? Is there going to be a quick recovery or a prolong crisis? Much will depend on the upcoming economic data to be released by US. Some calming news did emerge today, as US GDP for the 2nd quarter was better than expected, recording 3.4%, which was the strongest since the first quarter of 2006. It will be interesting to see if this latest piece of positive news help restore some confidence and stage a strong recovery in Wall Street.

Wall Street's volatility: Where do we go from here?

It's not uncommon to find Wall Street trading at a very volatile pattern over the over recent times and this has indeed unnerved many investors. Early part of July saw a one-day rapid rise of 2% but only to be followed by a series of see-saw battle where it's also not uncommon to see index fell by over 1% in a day. Last night was another example where Dow Jones index fell by 1.6%, triggered by fickle-minded investors who actively reacted to every bit of financial indicators or corporate news on the never-ending sub-prime property woes. Overall corporate earnings do not seem to help either, as results were mixed. This leads to a very volatile trading as a result of these events. However, it's key to note that the long term trend of Wall Street do appear on the uptrend, as indicated by the index surpassing the all important psychological 14,000 points.

As for Asia, most stock market (with the exception of China perhaps) in principle follows the sentiment of Wall Street. Indeed, huge foreign funds continue to pour into Asia which cause some alarm bells ringing in some countries particularly China. Authorities are generally concerned that this could be a potential bubble building and a possible scenario of withdrawal of currency carry trades may pull the plug again, as global interest rates appear to rise in general as a result of inflation fears and high crude oil prices.

In a latest measure by China authorities to curb over-heated economy and stock market, the Government has reduced tax on interest income in order to encourage more savings, and also liberated policies on local investors investing their funds overseas.

As we move into a higher risk environment, given the record high stock markets in many countries, investors should exercise more caution ahead. I believe fundamentals will continue to play an important role, and this is best supported by positive corporate earnings. In addition, investors should pick industries where high growth is anticipated and sustainable, such as oil and gas sectors, and companies with exposure to infrastructure and construction boom in certain countries such as China, India, Malaysia and the Middle East. Singapore also offers exciting opportunites ahead for its property, gaming and tourism industry. In fact, Singapore may be the most exciting country in the world right now in terms of property investments, fueled by the upcoming new casinos and the Integrated Resorts.

Malaysia's stock market has also done fairly well recently, achieving record highs after being a laggard for so long. Going forward, i believe the following industries will continue to lend great opportunities to investors, driven by different fundamentals:

1. oil and gas - as new oil fields coming into production stage
2. infrastructure and construction - due to Government's pump priming in line with the 9th Malaysia Plan (9MP).
   
3. plantation - driven by high demand growth as a result of economic boom in China and India, and development of biofuel as a substitute to crude oil
4. Property - as the Government continued liberalisation on property ownership by foreigners and the strategic moves to market Malaysia properties to the global market.
   

Fundamentals are also supported by generally positive corporate earnings and the same is expected to happen in the foreseeable future. However, there are still inherent risks which the Government needs to tackle quickly in order to enhance its competitiveness, including:

1. moving up the value chain for key industries particularly manufacturing and service industry
2. cutting the red tape and improve efficiencies in Government public service authorities to be compatible with global standards
3. execution of mega plans and targeted projects in a timely manner
4. Ability to continuously attract foreign investments in view of intense competition from better emerging markets such as China, India and Vietnam.
   
5. ensuring a smooth and successful General Election
   

It's Time To Be Back Blogging

My apology as I have been absent from blogging for about 2 weeks. I have been occupied by a number of things lately. Firstly, my new home renovation is coming to an end, and this is the time extra attention has to be given to attend to the outstanding work to be completed by the contractors. No doubt an early observation of any errors and poor workmanship is much easier to get them rectified sooner than later. Secondly, I had a wonderful one week vacation in Hanoi, Vietnam with my family members. Hanoi indeed offers so much colonial charm and natural beauty albeit inside a very crowded city with mostly motorcycles roaming the streets freely. After returning from vacation, I was unfortunate to catch a cold and that really got me off the mood for a good few days!

Well, so many events had happened in the past 2 weeks, including a whopping 2% one-day jump in Wall Street, which really strengthens investors' believes that US economy is not heading into recession albeit the sub-prime housing sector still being a threat to the economy. At the local front (Malaysia equity), the market is holding on steadily with slight upside bias, trying to rechallenge the all-time high above 1,390. Notwithstanding, profit taking quickly kicks in as local investors were not fully convinced of the market direction for now.

An important matter to take note of is that there are increasing speculation that the Malaysian Government may hold a General Election much earlier than expected. It could even be as early as the next one month. Personally I have doubt if the General Election will happen so soon. My projection is that the Election is going to be held during the first quarter of 2008. However, the Government may change strategy depending on political circumstances. So, be prepared for a major surprise, perhaps?

More Real Estate Incentives To Come?

The recent relaxation of residential ownership rules for foreigners and the real property gains tax (RPGT) waiver, high-end residential properties in Malaysia have attracted a fair amount of interest from abroad. Surveys have also shown that interests and transactions on high-end properties have picked up considerably. However, there remains to be issue of over hang at the medium and low-end properties. The result is an increasing price gap between high-end and mass market real estate properties. This trend has also extended to land pricing, where the highest transacted to date is somewhere between RM1,300 and 1,400 per square feet. The piece of land is located near Kuala Lumpur City Center (KLCC), presently occupied by a Chinese (Hakka) restaurant.

So what about the mass property market? There are certainly hope for the better going forward as the Government is considering to inject further stimulus into this sector of the market. Some potential stimulus include:

1. restructuring of EPF (Employee Provident Fund) holder's account allocation to tip towards greater balance (possible 50:50) and thus higher amount for housing withdrawal. Also, one may not have to wait until the first house is fully settled before withdrawal;
   
2. temporary waiver or reduction in housing stamp duty. The current stamp duty are: 1st RM100K : 1%
   next RM100K – 500K: 2%
   Next RM500K – 2.5 m : 3%
   Excess over RM2.5 m : 4%
   

The above if happens will definitely benefit the mass property market and also significantly remove some of the major over supply in this particular sector.

Besides, there could also be further added incentives for Malaysia's Real Estate Investment Trusts (REIT) and relaxation of policies on foreigner purchase of commercial properties. Malaysia REITs market is currently lagging other major countries REITs market such as Hong Kong and Singapore due to inferior tax incentives.

When will we know if this happens? Well, wait for September's 2008 Budget announcement. For those who want to buy or sell properties, you may want to hold on your decision until then.