Sunday, April 26, 2020

The Malaysian stock market does not look bright

COVID-19 really takes many by surprise. It is very different from other economic downturn. This downturn is global and it impacts basically every major country especially the very large developed countries. No country it seems would be spared and the largest of economy currently are busy fighting the virus. When this fight is partially or fully over, only then the economic activities would be fully restored. The problem with this time is, we do not know when. It is feared that by the time we reopen our economic activities fully, many companies would not have the ability to survive.

Although this crisis feels like it had happened over a long period, in actual fact the real effect has only been felt for less than 3 months - since February when it really started in China. In most economies and stock markets especially the recent ones, there were most often hope and people traditionally had thought that it would have recovered. This crisis will recover but it may take a long time for that to reach its full economic activities let alone growth. The fact of the matter is that this is just the beginning of a long war.

To compare, one should not compare 2021 or 2020 against its immediate previous year. It should not be year on year although it is good to get an indication of growth. The base year for any of this should be 2019.

For 2020, it is a given that the world is to face a recession, and we may even get to a depression if the crisis persist for a longer period. For economy to return, many countries are using debt. Companies that are hugely affected will need rescue and government will use the debt that they issue to fund those rescue - if it is of any major assistance. The ability for any government to issue debt would depend on each country's capacity.

US government is talking of up to $4 trillion in terms of additional budget. For Japan, it is in excess of $1 trillion. Malaysia? we do not have much fiscal ability. By my count, after the several stimulus that have been announced, Malaysian government is possibly raising additional RM35 billion at the moment. I believe that amount will touch RM50 billion, but we do not have much tools to raise further funds through debt.


The world's government are now raising debts. Basically every country. To pick up those, they need someone to buy. In US, they would have it easier to do that as US Dollar is the world's currency. Many countries, business companies would want to hold Dollar as a reserve. To do that, they are going to pick up the government bonds. Europe's EU will have some ability of the same. So is Japan. What about Malaysia? We will have challenges to raise bonds unless we offer attractive terms. What are those terms - good rates but would anyone be buying our bonds if the rates are attractive but the currencies may deteriorate?

So what does our government do? We grapple for our own funds to pick up those - organizations such as EPF, KWAP, Petronas, PNB. Many of these GLCs and statutory bodies would be needed to pick up a substantial portion of the country's bond issuance. However...

Once they pick up these instruments, they would forgo the other - which would be - they would be selling stocks and other assets. (Stocks is the most liquid though) In the case of EPF, it may look at selling its overseas stocks and patch them back into our MGS. They will be needed to defend our market as well.

Now do we know why despite the challenges faced by companies, EPF does not move an inch (except for the 7% contribution option given to employees) on requiring employers to reduce their contribution. This is because that net inflow of around RM3 billion a month into EPF is a necessary instrument to defend the country's trouble.

What should investors in Malaysia do then. Given the uncertain and tight monetary situation, one should wait. For the first time, one should hold safe assets - it may not be cash but some defensive companies or assets - really defensive ones.