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.
Why?
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.
8 comments:
Recently there is news flying around that Khazanah is selling TNB shares around RM1bil. It is a sign that these institution is trying to raise more cash. But from recent months i still see EPF buying into local company shares. Anyway don't forget that i-lestari has 1.5mil cases approved, averagely RM500 per person, the outflow would be around RM5-7bil on each month.
I just want to ask, is the magnitude this time can be comparable to 97 financial crisis?
The 97 financial crisis, had many big shocks due to depreciation of currencies from circa 2.5 right down to 4.8 within a short period time. During then, many financial institutions collapsed due to these shocks. But of course, it started with Thailand in the first half of 2017, and then spread over to many other countries in SEA and right up to Korea. That crisis was mainly due to weak reserves among financial institutions together with our country.
That crisis hit companies that were depending on imports and exports. It literally caused businesses to be difficult to make decisions due to the fast weakening of RM. Ofcourse, it also hit the bulk of the economy very fast and properties, constructions and FIs were the hardest hit.
We were attacked presumably by hedge funds whom were betting against our currencies.
So far the COVID-19 crisis, we have just experienced through perhaps 3 months at the most. Except for some industries like tourism, it did not hit the financial institutions at the moment. Banks are pretty strong now. There was one major downturn in stock market mid to end March.
If we are lucky, this one may feel like a person suddenly got sick and the economists whom are doctors in this case, will be providing medicine to allow the economy to heal bit by bit. Through that we will heal although will take a long time. THIS is what we hope.
But again, we are just going through early phases, we will not come back to say November 2019 situation in August 2020. It seems like we will be able to have activities in that order only from next year 2021 - 1st quarter if we are lucky.
After that, it will also have long struggle to pull the economy through as the whole world would already be on some form of life support by then.
As Malaysia is doing much trading, it is hope that the stimulus among the developed countries would help a small nation like Malaysia.
Hi Flick,
When you mention really defensive companies or assets, do you mean the consumer sector? Counters like Nestle are way too expensive for the average retailer even though it has trended down lately. Whereas the healthcare index has surged 30% in the past months or so.
Or should we consider gold counters like Poh Kong etc.? Thanks
Hi,
What's your opinion on PIE? Can they sail through this down turn unscathed and even coming out stronger than ever?
Thanks.
Hi Justin
Defensive in today's context could also be toll operations, they may be affected in the short MCO period, but have seen to drop. Consumer staples is definitely defensive. DKSH will be less affected. They distribute pharma, consumer staples.
As for our export companies, they are affected but will be much less affected than some. In fact export companies should be our saviour riding out this economic mess.
I think PIE's balance sheet is sound, hence it will have no problem sailing through this. It will be affected in its sales no doubt as people are probably buying less all over the world.
Thanks for your opinion. just a small follow up. What about the trade relocation which PIE will be beneficiary. This investment angle still hold in current scenario?
OUTLOOK, PROSPECTS AND FUTURE CHALLENGES
Although we registered a lower net profit in FY2019, the Group will continue to keep up the pace in order to maximise shareholders’ value. Our business development team endeavor to pursue profitable projects with high-margin and lowvolume products from potential new customer. The Group is optimistic to secure higher sales order from new customers in
the coming financial year.
In terms of effective operations, we strive to improve our on-time deliveries of high quality products to our customers while building a good relationship with our suppliers to secure material source and pricing. Moreover, we continue to incorporate process of automation project and invest in automated machinery where economically feasible to further improve production efficiency and productivity. The Group expects lower labour and material costs as well as higher quality and more precise products by integrating the automation processes in the production.
The revenue from manufacturing segment of industrial electronic products is expected to grow as the Group has received enquiries from holding company looking to shift manufacturing base to its related companies in ASEAN. We will share good
news with our shareholders should our efforts on approaching this opportunity come to fruition.
The above is management discussion from PIE Industrial from its latest Annual Report last week. Think we can get a cue from here, that perhaps its head office may pass over some manufacturing deals to PIE.
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