On the Beat | By Wong Chun Wai

Facing external market forces

Following the recent bullish run, helped by oil palm plantation stocks, Malaysians had hoped the run would continue ahead of the general election and possibly a Chinese New Year rally. 

There was talk of second and third liner stocks following the blue chips, where ordinary punters would make money from Umno-linked counters and there being a trickle down effect. 

But as the Dow Jones Industrial Average collapsed, the tumbling effect hit the world. When the United States is hit, no one is spared – that’s the reality. 

The Wall Street Journal reported on Tuesday that even the Bank of China appeared increasingly likely to report a large write-down on its investments in US mortgage securities, the result of the sub-prime crisis where huge loans were made to borrowers with weak credit. 

The Fed move – described by many analysts as an “emergency measure” to stem panic and fear sweeping world markets – came after US President George W. Bush announced a stimulus package of US$150bil (RM490bil) for the US economy which was fast sliding into, if not already in, recession.  

For the small Malaysian investors, the question is what should they do in these uncertain and turbulent times? Should they take advantage of the rebound and sell out? Or should they see the rebound as an opportunity to pick up under-valued stocks? 

All eyes will be on Wall Street again tonight (Malaysian time) when the US markets open for trading. When the Fed announced the 0.75% interest rate cut on Tuesday, Wall Street actually ended the session down 128 points. 

It fell more than 300 points during intra day trading on Wednesday but rebounded strongly to end by nearly 300 points. It was a roller coaster ride no doubt. 

The bulls and the bears are still fighting it out. The bulls argue that the problems of the US sub-prime mortgage crisis have already been factored into the market – that the big US banks have already made provisions for losses from their involvement in the sub-prime debacle; and that under the Bush economic stimulus, the hefty rate cut plus the likelihood of another cut when the Fed meets next week will help the US economy to avoid a recession. 

The bears suspect the Fed emergency rate cut shows that the US economy and stock market are in far worse shape than officially acknowledged; that the US government is running out of bullets to fight the impending recession, and that the market turbulence has still to run its course. 

If you have been watching the CNN Richard Quest coverage of the World Economic Forum in Davos, you would have observed how divided the experts are over the state of the US economy.  

A strong recovery over the next couple of trading sessions on Wall Street would be a great relief to the US Government and the bulls; while further falls in the indices would rattle already battered nerves. 

Given this uncertain climate, caution should be the guiding principle for Malaysian stock market punters. 

For punters who did not take advantage of the local market run-up in early January, it’s too late to take profits. For those who are staring at some losses, it’s probably the wrong time to sell. As the saying goes: “You don’t make a loss if you don’t sell.” 

But stockbrokers are telling investors that there are some buying opportunities on Bursa Malaysia. If you are not worried about the volatility that is likely to be a feature on the Malaysian and world stock markets in 2008, and take a medium-term view of three to five years, there are currently some good buys on the Bursa. 

Another point to note: We must make a distinction between the volatility in the stock market and the broader economy. 

It is important to understand that stock market turbulence is very much the result of external factors, emanating from the United States. The US crisis is largely a banking and financial crisis. 

The Malaysian economy remains strong and its fundamentals are largely intact. The Government’s finances are strong with rising revenue from oil and income taxes. The Government’s commitment towards reducing the budget deficit remains on track. The country’s external reserves are very healthy.  

Also, inflation remains manageable. At 2%, it is much lower than inflation in many countries including China, Hong Kong, Singapore and Australia. 

It is a point which many ordinary Malaysians, some used to a pampered life with subsidies, do not realise. The rising cost of goods, unfortunately, is a global trend due to escalating oil prices and the shortage of raw materials. It is essentially out of the Government’s control. 

As Deputy Prime Minister Datuk Seri Najib Tun Razak pointed out on Wednesday, 30% of items used to measure inflation were mainly price-controlled goods while the others were heavily subsidised items, like fuel. 

The year 2008 will definitely be a more challenging year than 2007 both for the stock market and the economy.  

What can be said is that the Malaysian economy is in a far better position than most to meet the challenges ahead.