2014 was a year of unpredictable events, especially in its latter half. The sharp fall in crude oil prices was a major market shocker. It’s plummet from US$105 per barrel in mid-2014 to the US$40s this January are due to factors such as rising shale gas production and the global decline in energy demand, causing concern for oil dependent economies including Malaysia. A slowdown in the Chinese economy to its slowest pace since the global financial crisis made markets jittery, along with the Russian-Ukraine crisis. Later on the Russian central bank raised its interest rates by 650 basis points over-night in mid-December from 10.5% to 17% in response to the ruble’s freefall on the foreign exchange market, and Abenomics did little to curb Japan’s inflation this year, leading to more stimulus in its economy.
The events rounding off 2014 may present a bearish outlook for 2015. However, not all is doom and gloom, as long term fundamentals will stay the same and there are silver linings to be seen. Oil may be throwing the global economy into a frenzy now, but it’s good to remember the last time it was around this level at USS$43 per barrel in February 2009, it nearly doubled back up to US$76 in June the same year.
Also, the US dollar has strengthened substantially and is becoming a safe haven bet once more, and the US economy is visibly improving. The Federal Reserve stopped its quantitative easing measures last October, and its growth indicators point to strong employment growth, improving household balance sheets, favourable financial conditions and a recovering housing market. Overall, a strong US economy will benefit global growth, as the US is the largest consumption market in the world.
While China’s growth is expected to decline to a low 7% in tandem with its economy transitioning to a more sustainable path and as Japan’s gross domestic product (GDP) is forecasted to contract, a gradual but weak recovery is expected in the Eurozone as the European Central Bank pledges to use further unconventional policy tools to spur European economies, bringing about ample global liquidity in the market.
On the local front, Malaysia’s fundamentals are still intact and poised for further growth. Our foreign currency sovereign credit rating of “A-“ for long term and “A-2” for short-term by Standard & Poors’ Ratings Services affirms the country’s strong external balance sheet and monetary flexibility. Real GDP is expected to grow at 5% for 2015, driven by improved private consumption made possible by rising incomes and favourable labour market conditions.
Malaysia’s fiscal performance has also improved and is anticipated to average at 3% of GDP through 2015. The implementation of the goods and services tax (GST) in April 2015 will alleviate some pressure on public finances. The general expectation of moderation in exports next year will be mitigated by slower imports, as nearly two thirds of our imports are related to export. Net exports and thus current account surplus will continue following better global demands. Malaysia, along with other Asian economies, is also likely to benefit from the US economic rebound as its current account surplus and ample domestic liquidity serve as “buffers” to potential external financial shocks to Malaysia. Favourable domestic liquidity conditions will also offer opportunities for investors to profit from the Malaysian equity market.
The Malaysian stock market has been the worst performer in the region to-date. However, its recent sell-down has neutralised and will ease the over-stretched stock valuations, becoming more attractive now from oversold positions. Malaysian equities with attractive valuations will soon attract inflows when the dust settles.
Malaysia’s corporate earnings are also expected to grow despite being impacted by lacklustre performances in the oil and gas, commodity, banking and construction sectors. Corporate earnings are likely to rebound after having stayed at a low base. More importantly, many corporates will continue their dividend payout policy, which will make Malaysia a defensive yielder.
On the fixed income market front, it’s poised for a healthy but challenging year ahead. Upward pressure on interest rates will mount from the improving US economy, signaling higher interest rates there. When that happens, interest differentials will narrow and edge our domestic rates upwards. Additionally, GST will add to the already elevated inflation rate. Mitigating these are the subdued regional economic outlooks, starting with moderating Chinese and shrinking Japanese economies. Bank Negara Malaysia will be mindful that domestic inflation is cost push in nature and declining disposable income may outweigh the need to raise rates.
In terms of sectors to watch in 2015, we are positive on Economic Transformation Programme (ETP) related companies as the ETP has generated significant investments since its launch in 2010, garnering total committed investment of RM219.3 billion from 196 projects. We’re also optimistic about export oriented sectors and some dividend yielders, and small to mid-cap oil and gas service-based players as most of them have contracts for the next two to three years where earnings are quite stable. In line with an anticipated strong US recovery, electrical and electronics counters and exporters should benefit from a strong US dollar. As Malaysia begins its GST implementation this year, we’re cautious about the consumer sector, based on the experience of Japan, Singapore and Australia post-GST.
Taking everything into account, we maintain that slow and steady wins the race. The longer you remain invested, the less chance that your original investments will lose value. Crafting a balance between the two major assets of equities and fixed income is dependent on ones needs, but staying invested is crucial to ensure asset growth. Investing is a life-long process especially for wealth generation, so don’t be nervous about the short term noise.
