How is Malaysia handling the global liquidity?

This week, The Edge analyses the impact of the shift in fund flows and the imbalances of the global economy on Malaysia and Malaysians.

The aggressive policy measures by the US, Europe and Japan has resulted in massive liquidity finding its way to the emerging markets in search for better returns as the bond yields in US and Europe declined sharply.

Emerging markets have attracted foreign capital due to its higher yields, stronger economic growth and as such, better appreciation prospects for a wide range of asset classes.  Like other emerging markets, Malaysia has enjoyed the benefits of these foreign fund inflows which boosted the prices of local assets including stocks, properties, bonds and the Ringgit.

This is however, not without cost. Bank Negara Malaysia’s balance sheet has expanded substantially with the rising cost of sterilization. Keeping interest rates artificially low has resulted in negative real interest rates. This encourages consumption and discourages savings which in the longer term can weaken the Country’s current account. It also creates asset bubbles. 

Read the full article in The Edge this week.

Next week, we will discuss how this party can end and what the consequences are to the stock market, bond market, property market and the Ringgit.

Property transactions fell in 2013, expect lower prices in 2014

In my blog posting in March, “Staying cautious on Malaysian properties”, we cautioned on a challenging property market in 2014 on signs of excess supply and slackened demand that are likely to put pressure on property prices and yield moving forward.  This is amplified by the impending GST imposition which will take effect in 2015.    

The data from the Property Market Report 2013 substantiated our concern.  It reveals a drop in overall transactions volume by 11% year-on-year to 381,130 in 2013.  Residential segment is still the key segment, accounting for 65% of the total volume and 47% of the value of transactions in 2013.  The national average take-up rate for new launches declined to 45.1% in 2013, which is the lowest take-up rate since 2009. This we believe was mainly due to the credit-tightening measures by the banks.   

In terms of supply, Selangor and Johor are the leading states, accounting for 21% and 17% respectively of the total incoming supply in Malaysia. 

In 2014, we expect lower residential transaction volumes to continue. Historically and rationally, a fall in volume is a precursor to subsequent lower prices.  Developers’ ability to raise or maintain prices will depend largely on the market demand.  If demand falls and market conditions persist, price declines may be inevitable due to the competition to sell and to generate cash flow.  The ability to defer launches will also be limited in view of the costs implication.   

Read the full report in The Edge this week.

Understanding fund flows and how the party ends

In this week's State of the Nation's update, we analyze how deflation remains the overwhelming fear of policy makers in the US and Europe and the impact of the major economies’ policy decisions on other countries.

Inflation rates in the US and Europe are currently still below the 2% target rate.

CPI % change (y-o-y) since last year
Country	% Change	Date
US	0.20%	Mar-2014
Europe	0.60%	Mar-2014
Japan	1.50%	Feb-2014
Source: Bloomberg

Deflation can cripple the economy and has major policy implications as it limits the ability of central bankers to encourage borrowings by creating negative real interest rates and may hinder their ability to raise future interest rates.

The real value of debt will go up in a deflationary environment, producing financial strains to both households and businesses alike. 

Since 70% of the US economy is driven by consumption; economic growth, employment and policy decisions on interest rates will be largely dictated by when US households begin to spend again.

The ultimate goal of the major economies in US, Europe and Japan is to rebalance the global economy away from where the rich currently borrow massively to buy things from the emerging economies.

However, the emerging economies have learned to protect their long-term interests. 

The developing countries are hoarding by building up dollar reserves, to prepare for subsequent intervention when fund flows ultimately reverses. The effect of this is to keep the currencies of emerging economies weak to spur their exports, making the rebalancing of global economies even more difficult.

Read the full article in The Edge.

Next week, we will analyse the impact on the Malaysia’s bond and stock market.  We will look at the reasons for the high levels of liquidity and what drives it. Why foreigners bought our bonds and equities, and what will make them sell or perhaps buy even more. 

The analysis on Malaysia is with a view that US must preemptively rein in its excess liquidity of some US$3 trillion. With an expected sustainable economic growth months away, its money supply could explode, threatening the next round of asset bubble.

Why liquidity stays high?

In this week’s update on the State of the Nation, The Edge explores the reason(s) behind the continued liquidity in the emerging markets despite the tapering of Quantitative Easing (QE) in the US which has continued as scheduled.

After a shaky start to the year, equities in emerging markets are surprisingly, back in the black – at least for now, after the strong gains in the past two months.

What has changed since then and are investors now being overly optimistic?

Why liquidity stays high despite expectations of foreign sell-out in emerging markets following the QE tapering?

The answer lies in expectations that there will be sources of liquidity from other parts of the world, and that the pumping in of money from notably Japan and the EU will continue.

The deflationary environment in the EU is prompting investors to expect further printing of money to stimulate growth.

Read the full article in The Edge this week.  

We will provide further analysis on the view that this global deflation will be addressed by monetary expansion.  More to the point, what this means for the Malaysian stock market, bond market and the Ringgit in the weeks ahead.  Stay tuned.

Why has another Iskandar launch faltered?

Since the latter part of last year, we have written extensively on the anticipated slowdown of the property market in Malaysia.

We paid particular attention to Iskandar, Johor. From literally plantation estates and nothing more, it became the “Promised land” to many developers, investors and property owners.

Over the last few months, there has been a series of mega land deals, some involving land reclamation. This has shocked the market and changed sentiment.

A photo of Puteri Harbour Masterplan obtained from UEM Sunrise Sales Gallery

The latest launch last weekend is by Singapore-based Pacific Star Development Pte Ltd in Puteri Harbour, Iskandar. The Puteri Cove project comprises three 33-storey residential towers with almost 1,000 units on 7.8 acres of land.

Tower 1, with 329 units, was launched several months ago and currently has a roughly 70% booking rate.

Tower 2, also with 329 units and 33 storeys, was launched last weekend. It attracted a booking rate of only about 25%.

The poor response to Puteri Cove is in sharp contrast to the launch of the nearby Teega project by UEM Sunrise Bhd in late 2012, which was 98% sold within a month of its launch.

Apart from the now weaker overall market sentiment, there may also be some other reasons for the poor take up at Puteri Cove.

One major reason could be pricing. The “sea view” units are priced at between RM1,300 to RM1,450 psf. The “marina view” units are priced at between RM1,500 to RM1,600 psf.

These prices are higher than the top end of the market in terms of new launches in the area, in a now weaker environment.

Meanwhile, there is also the issue of design. A property investor commented that the design layout of the building looks like flats, with long corridors and up to 14 units per floor served by four central passenger lifts and a service lift.

It remains to be seen whether Puteri Cove’s poor launch take-up rate is due more to the weaker property market or its pricing or other issues.

Whatever the case, it highlights two important lessons.

One, Iskandar is like the goose that lays the golden egg. Don’t kill it by over-expanding development and supply.

Two, a more challenging market means developers must offer their customers a better all-round value proposition.

Read more on this in The Edge this week.