Saturday, November 08, 2008

How Bad

Datuk has left a new comment on your post "Morgan Stanley Asia Not So Bearish":

I think KLSE has dropped more than 45% today compared if peak point. Do you think 45% of down turn in index is not enough for us to consider collapse ? In fact, KLSE is in line with other bourses in the region ...virtually in collapsing situation! The only difference is the dropped in the KLSE index is less severe compared its peers.

Obviously, there were several factors for that:

i)In the most recent bull cycle, the performance of KLSE has been well below its peers in Asia region. Hence, it's within our circle of expectation that the down turn in KLSE will be less severe compared other region.

ii)KLSE is supported by two of our natural endowments, petrol and palm oil. The prospect for these commodities only changed negatively and drastically in August-September period. Thus, the negative impact for big cap in KLSE is less clear to most of the investors and research houses.

iii) The petrol hike in June this year and its hyper inflationary impact across all sectors had destroyed the market demands among the middle class and damanged the consumer sentiment. The sudden changes in the macro and micro economy climate caused, small investors and local institutional buyers will shy away from the equity market. Thus, foreign funds are not be able to liquidate their investment timely. Otherwise, it would incur hugh losses. That's the explanation of foreign stake in bursa is lingering in the range of 19-20%. (I think foreign funds have liquidated Malaysian stocks way earlier than other Asian markets such as Singapore, HK, Thailand, Japan and Indonesia. The only other one which fell earlier like Malaysia was South Korea - in hindsight, Malaysia was sold down on heightened political uncertainty, which now looked like a blessing in disguise. Korea had other fundamental issues which brought the market there down earlier. The current foreign shareholding level in KLSE is pretty low, only long term funds are in. To say that foreign funds did not have a chance to sell is flawed. If they want to sell, they will sell regardless what the price is. Sell IOI at 6, np... how about 5, still ok, 4... hmmm just do it... errr 3... I SAID SELL...)

Having said my opinion, KLSE will be in down south direction in the next 2 years when corporate earnings are heading in the similar direction.

Thus, when the dropping momentum in index is slow, the recovery momemtum in index is expecte to be slow.

Hence,it's not easy for the small investors to timing for good entry point as the future direction is not clear and the tendency to compare prices by using the previous peak point which is no longer relevent as the earning equation is less visible.

Stay out from the market is more pragmatic as i don't believe anybody can spot the recovery at this juncture. Worse is yet to come. (Agreed, there is absolutely no hurry to buy stocks. Many still are oblivious to the coming down trend. Ask any real estate agent... give the seller a 15% lower price as a bid, the seller will say they can still make payments, and will hold out for the price when things are better in 3 months... if that is not ignorance, I don't know what is. The slowdown may not cripple Malaysia, will see its usual cascading effects. Stock markets have lost 40% from its high.

The usual yardstick is property will see a 6 month delayed effect. Its usually the last thing to go. Finances are structured this way:

1) New loans shrinked considerably (happening already).
2) Reduced wealth effects from stock market.

3) Spending curtailed. Nice to have items first to go such as overseas holidays (happening already), and new car purchase.

4) Our biggest sector is electronics, not oil and gas or palm oil, guess the impact on jobs there.

5) Credit card defaults rise, go ask your banker friend of the trend there.

6) Next to go will be car payments, look for repossessed cars, ask your repossesor friend of the trend there.

7) Jobs stagnant or being cut, we must also remember that every day there are new graduates entering the workforce.

I am not saying that we will see a 30% price correction in properties, but at least 15%-20% in most areas and some sub sectors will see 30%. The worst hit is likely to be the high end condos and unoccupied high end bungalows. Yes, they are rich people but a lot of these have been bought by HKers, S'poreans and Indonesians... and not one or two lots, but a few lots. The leasehold types over RM2m will go down first. Things are going to go down 20% at least in Singapore and HK, Malaysia will feel those effects.
Beng able to afford repayments is only one part of the equation. People will hold or maintain their leverage when the assets are steady or going to go up. If things are not going up, they will go down. Even if those people can afford these properties, they will be sold just like stocks. Many of these are ready for occupancy now. Try and rent out the RM2m condos at RM5,000... good luck, and thats just a gross yield of 3%... Buyers of any property above RM1.5m will at least have 2 or 4 more somewhere else. You do the math. Properties below RM1 may see a more subdued loss of 10%-15% and may be able to ride them out better.

Just imagine even when you want to sell, how much harder is it now for people to commit to a RM500,000 or RM1m housing loan... and don't you think the banks will make lending that sum a lot harder now).

p/s photos: Haruna Yabuki


solomon said...

If one have prudent management like YTL, it will time to snap up good value investment during distress time.

Following the pack might be a good idea, at least it would hurt the purse. But, come to think of every recession, there is some good opportunities be it stock or houses.

No matter how bad it is, life still have to carry on, be selective in investments. High chances that the returns will be higher. A hybrid of investment style of Warren Buffet and Peter Lynch will be good.

Market will come back one day.


Avatar said...

Well, Datuk definitely seems to have his analysis spot-on.

Positive news will likely be few and far-in-between for at least the next one year. The market will move side-ways or downwards for now.

Picking up good investments selectively would be a good idea, only if one has surplus cash available. With so many 'Black Swans' these days, it's hard to predict what's going to happen in the near future.


Anonymous said...

Some financial market pundits turn out to be amazingly accurate regarding the current scenario. Nouriel Roubini is one such. There is another one called Christopher Laird. A search with Google with the terms "christopher laird economy" showed up an article of his that was written on 14th March 2007 that is eerily prescient. Imagine, that article was written a whole ten months before the KLSE peaked at slightly more than 1500 in January 2008.

Another writer who is unrelentingly pessimistic is Matthias Chang (former aide to Tun Mahathir) who felt that things can only get worse, a great deal worse, from here on.

Reading all these certainly can lead to sleepless nights doesn't it.

What's your take on this? Do you think the economy and the stock markets are going to get really ugly in the coming months? Hope you can elaborate on this in your blog.

Ivan said...


- The worst hit is likely to be the high end condos and unoccupied high end bungalow.

a) how about normal condo or property price? does this will also affected? price reduce 10-15% as well?


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