Smaller contractions fuel hope of recovery

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KUALA LUMPUR:  Global stock markets, including the Malaysian bourse, soared to fresh highs last week as investors cheered policymakers’ commitment to recharge a lethargic world economic landscape marred by falling demand and exports.

While many nations are still expected to be mired in a sea of less-optimistic economic data in the coming months, the good news is the contractions in economic activities are happening at a slower pace, economists said.

This was lending credence to assumptions that the global landscape was stumbling on a slow but sure path to recovery, they added.

“People are seeing signs of improvement in terms of smaller contractions in some of the leading  indicators like the manufacturing activity in the US.

“Globally, things have hit a trough, and people expect things to stabilise in the second half of  2009,” RHB Research Institute Sdn Bhd economist Peck Boon Soon told The Edge Financial Daily in a telephone interview last Friday.

Malaysia’s latest external trade figures are worth noting. The nation’s exports for February 2009 contracted at a smaller annual quantum of 15.9% to RM39.59 billion. The decline was due to lower overseas sales of key products like electrical and electronic items and commodites in major markets.

In January 2009, local exports recorded a yearly decline of 27.8%. On a monthly basis, February 2009 figures were 3.4% higher, a significant change from January’s 16.9% monthly contraction.

The key question is whether the worst is over for the Malaysian economy and capital markets?

Not yet, according to Peck, who anticipates the country’s gross domestic product sinking into negative territory in the first half of this year.

“Malaysia will see contraction in the first half of 2009, which is expected to result in a techical recession.

“Once the external environment improves, it will translate into a better export environment for Malaysia towards the end of 2009. The stockmarket usually reacts six months ahead,” the economist said.

The US’ Dow Jones Industrial Average rose above 8,000 points last Thursday, the first  time since Feb 9 this year, and spurred global equity markets.

This came after world leaders at the G20 summit in London had agreed to commit US$1.1 trillion (RM3.9 trillion) to help struggling economies, and combat the on-going economic crisis, deemed the worst in 60 years.

In Malaysia, the Kuala Lumpur Composite Index topped the 900-point mark last week, a level not surpassed since Feb 16 this year, partially, due to a greater clarity on the nation’s political  climate.  

Datuk Seri Najib Razak was sworn in as Malaysia’s sixth prime minister last Friday, taking over from Datuk Seri Abdullah Ahmad Badawi who had held the nation’s top job since October 2003.

TA Securities Holdings Bhd head of research Kaladher Govindan said: “The recovery is sentiment driven, and I believe it is not sustainable. The Malaysian and US economic fundamentals have not changed much”.

“The Malaysian market is expected to ride on the volatility of cyclical stocks in the oil and  gas, plantation, and construction sectors.”

Kaladher’s list of “high risk, high return” stocks include names like KNM Group Bhd, IOI Corp Bhd,  and Gamuda Bhd.

Commodities prices’ potential rise will be closely watched. This comes against a backdrop of a weakening US dollar, and lower supply of crude oil globally, a situation which bodes well for crude oil prices.

Higher crude oil prices will in turn spur demand for palm oil as feedstock for the production of biodiesel, deemed a cheaper alternative compared to crude oil.

At the same time, costlier energy is expected to translate into higher inflation, which induces demand for gold as a hedge against rising prices, and safe haven in a sea of financial turmoil.

“I believe crude oil prices have bottomed,” said Kaladher. Prices of crude oil futures had risen to US$51.90 a barrel last Friday from a low a US$32.40 a barrel in December last year. The commodity’s rates touched a historic high of  US$147.27 in July last year.

Meanwhile, palm oil prices for June 2009 rose to RM2,148 a tonne last Thursday, its highest in about three months, from a low of RM1,530 a tonne in December last year. Spot prices for gold have also advanced to about US$900 an ounce last Friday compared with about US$700 an ounce last November.

This article appeared in The Edge Financial Daily, April 6, 2009.