Sunday, November 24, 2019

Where are our stocks heading? What should our focus be now. Part 2

The government today is pushing hard on automation and investments while reducing unskilled foreign labor although the strategy may not bear as much fruit for the moment.

Why is the government doing this? Before we go deep into the sectors and where should the growth be in Malaysia, let's look at the components of growth in the perspective of Malaysia and where should our focus be.

Let me put the context of economic growth to a simple 4 portions

Consumption (C) + Investments (I) + Government Expenditures + Investments (G) + (Export(X) - Import (M))

Consumption basically depends on the economic strength of the country and also how fast the velocity of the money flows. As a country we have been increasing and to a certain extent dependence on local Consumption for much part of our growth in the last 15 years. One can see through the strength of private consumption, so much so that our private debt to GDP exceeded 80% for quite a number of years now.

Investment (I) refers to in this case corporate private investor invests into the country. They may be foreign or local investor. One trend that we see nowadays is the public-private investment (PPI) initiatives as government will not be able to afford to invest and manage those projects themselves alone. Through an agency such as MIDA, we have also been encouraging foreign investments besides local.

Government (G) is where we see the expenditure of the government both in operational and capital expenditure. Both operational and capital are important as operational is where government employees' remunerations are paid as a consumer as well while developmental expenditure and mainly the investments which are made by government rather than private sectors. Examples of developmental expenditure are building of schools, hospitals, roads.

Lastly, the component of Exports (X) and Imports (M) which is highly relevant for a trading country like Malaysia. For certain industry, Import and Export goes hand in hand. Example trading industry. If there are no value add, then we are merely acting as traders. We import and export the same product. When there are value add for example, buying semiconductor components, materials - enhance them - we export them back into finished goods or more developed components. A strong country will be able to sell services as exports for example Intellectual Properties.

From the above, countries will work on various components in coordination among various departments, ministries. At different stages each country would develop their different components on various speed and level. Example, in the 1950s, US was pretty strong as an export country. Today, it is very a country doing much more Imports. China was such during its developmental years from 1980s until now. Recently, the internal policies have also been developing local consumption.

How do those four segments above interlinked. They are Vastly and Highly interlinked. Without investments for example, be it local or foreign, the Exports component will not be strong eventually. Without investments in ports, roads for example, there would not be further investments in trading, transportation, factories, housing.

Without strength in investments and Exports and Imports, we would not be able to grow our consumption. Malaysia was developing our local consumption sector post financial crisis in 1998/99. The velocity of the consumption will also create more consumption. However, for a country which is limited by its per capita income at a developing nation level, to grow consumption without focus on other components, higher debt will kick in. Too much debt is a problem as we have seen the collapse of the sub-prime housing crisis in US.

Malaysia is now at a stage where consumption is at its high while local private investments (non-GLCs) is tapering for some time now. We need to readjust. There is a need for more local private and foreign investments to promote strength in other segments.

I see that the government is aware of the above sporadically but the issue now is that the coordination is poor. Attempts are being done to balance wealth by assisting the lower income group but without clear strategies to promote investments, it is more of a rebalancing act to increase consumption growth. This can't last.

For Malaysia to grow, it will need private investments. Government sectors should be more of an enabler rather than competitor. This is where we have failed to address. While foreign investors are good for the country, in the longer run, local investors need to be competitive. There should also be a balance here as we tend to be overly dependent and eager to support foreign investors rather than local companies.

Our focus will have to change and I see there is a need for even Bursa to play its role.

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