Deflation: Why falling prices in China raise concerns

Published

By Annabelle Liang & Nick Marsh

BBC News, Singapore

China's economy has slipped into deflation as consumer prices declined in July for the first time in more than two years.

The official consumer price index, a measure of inflation, fell by 0.3% last month from a year earlier.

Analysts said this increases pressure on the government to revive demand in the world's second largest economy.

This follows weak import and export data, which raised questions about the pace of China's post-pandemic recovery.

The country is also tackling ballooning local government debt and challenges in the housing market. Youth unemployment, which is at a record high, is also being closely watched as a record 11.58 million university graduates are expected to enter the Chinese job market this year.

Falling prices make it harder for China to lower its debt - and all the challenges which stem from that, such as a slower rate of growth, analysts said.

"There is no secret sauce that could be applied to lift inflation," says Daniel Murray from investment firm EFG Asset Management. He suggests a "simple mix of more government spending and lower taxes alongside easier monetary policy".

When did prices start falling?

Most developed countries saw a boom in consumer spending after pandemic restrictions ended. People who had saved money were suddenly able and willing to spend, while businesses struggled to keep up with the demand.

The huge increase in demand for goods that were limited in supply - coupled with rising energy costs after Russia's invasion of Ukraine - inflated prices.

But this is not what happened in China, where prices did not soar as the economy emerged from the world's tightest coronavirus rules. Consumer prices last fell in February 2021.

In fact, they have been at the cusp of deflation for months, flatlining earlier this year due to weak demand. The prices charged by China's manufacturers - known as factory gate prices - have also been falling.

"It is worrisome as far as it shows that demand in China is poor while the rest of the world is awakening, especially the West," Alicia Garcia-Herrero, an adjunct professor at the Hong Kong University of Science and Technology, said.

"Deflation will not help China. Debt will become more heavy. All of this is not good news," she added.

Why is deflation a problem?

China produces a large proportion of the goods sold around the world.

A potential positive impact of an extended period of deflation in the country may be that it helps to curb rising prices in other parts of the world, including the UK.

However, if cut-price Chinese goods flood global markets it could have a negative impact on manufacturers in other countries. That could hit investment by businesses and squeeze employment.

A period of falling prices in China could also hit company profits and consumer spending. This may then lead to higher unemployment.

It could result in a fall in demand from the country - the world's largest marketplace - for energy, raw materials and food, which would hit global exports.

What does this mean for China's economy?

China's economy is already facing other hurdles. For one, it is recovering from the impact of the pandemic at a rate that is slower than expected.

On Tuesday, official figures showed that China's exports fell by 14.5% in July compared with a year earlier, while imports dropped 12.4%. The grim trade data reinforces concerns that the country's economic growth could slow further this year.

China is also dealing with an ongoing property market crisis after the near-collapse of its biggest real estate developer Evergrande.

The Chinese government has been sending the message that everything is under control, but has so far avoided any major measures to encourage economic growth.

Building confidence among investors and consumers will be key to China's recovery, Eswar Prasad, a professor of trade policy and economics at Cornell University, said.

"The real issue is whether the government can get confidence back in the private sector, so households will go out and spend rather than save, and businesses will start investing, which it hasn't accomplished so far," Professor Prasad said.

"I think we're going to have to see some significant stimulus measures (including) tax cuts."

Additional reporting by BBC business reporter Peter Hoskins.

https://www.bbc.com/news/business-66435870

Quality: The Good versus Bad Billionaires

The Good versus Bad Billionaires

Good billionaires emerge outside "rent-seeking industries."  

Common rent-seeking industries are construction, real estate, gambling, mining, steel, aluminum, oil, gas and other commodity sectors that mainly involve digging resources out of the ground.  

In these businesses, major players often spend their time extracting maximum rents from limited national resources by bribing politicians if necessary, not growing national wealth in innovative ways.

New names on the billionaire list can be a favourable sign.  Looking at the scale of billionaire fortunes is not enough to reveal the extent of their political vulnerabilities.

Comparing the share of the wealth generated by "bad billionaires."

To make a qualitative judgement about the sources of great fortunes, compare the total wealth of tycoons in these corruption prone businesses to that of all billionaires in the country.  

This no doubt miscasts many honest mining and oil tycoons, but even in nations where these industries are relatively uncorrupt, they tend to make weak contributions to productivity and to tie the economy to the volatile swings of commodity prices.

Good billionaires

This label is for tycoons in industries that are known to make the largest contributions to growth in productivity or that make popular consumer products, like smartphones or cars.

These "good" industries are the ones least likely to generate backlashes against wealth creation; they include technology, manufacturing, pharmaceutical, and telecoms, as well as retail, e-commerce and entertainment.

How are nations generating their wealth?

Analysing billionaires does offer anecdotally telling, real-time evidence of how nations are generating wealth.  

• Countries with small percentage of bad billionaires

Among the largest developed economies of 2019, bad billionaires controlled the smallest shares of billionaire wealth: in Italy (7%) and France(9%) - a good sign for both countries.

Only 13% of Swedish billionaire wealth originates in rent seeking industries.  Much of the rest is created at globally competitive companies, including H&M in fashion and IKEA in furniture retailing.

• Countries with large percentage of bad billionaires

Few new or good billionaires are to be found in nations like Turkey or Russia, where aging regimes have turned away from reform and promoted favoured tycoons.  The undisputed capital of connected tycoons is Moscow.  Nearly 70% of Russian billionaire wealth comes from bad billionaires.  The Kremlin treats billionaires with contempt, arbitrarily changing rules that govern their businesses knowing the public has little sympathy for a billionaire class widely perceived as corrupt.  

Popular resentment against great wealth is palpable in Mexico as well, where bad billionaires also control close to 70% of billionaire wealth.  Mexican tycoons are known for cornering industries such as telephones and concrete, which earn monopoly profits for their owners while driving up prices for consumers.  

Bad billionaires typically arise in family empires, particularly in the emerging world, where weaker institutions make it easier for old families to cultivate political connections.

China's historical debt binge

September 2008, pre-Lehman Brothers bankruptcy

In September 2008, China's economy was slowing.   The Shanghai stock market had just crashed.  Property prices were weak.  The Chinese officials said China was entering the middle-income rank of nations, so it was time for it to slow down as previous Asian miracle economies, like Japan, South Korea and Taiwan, had.  They talked about cutting back on investment, downsizing large state companies and letting the market allocate credit, which at this point was not growing faster than the economy.  Between 2003 and 2008, credit had held steady at about 10% of GDP.

October 2008, post Lehman Brothers bankruptcy

Lehman Brothers filed for bankruptcy in the US and global markets went into a tail-spin.  Demand collapsed in the US and Europe, crushing export growth in China, where leaders panicked.

By October 2008, the Chinese government had reversed course, redoubling its commitment to the old investment -led growth model, this time by fueling the engine with debt.   From 2008 through 2018, total debts would increase by $80 trillion worldwide, as countries fought off the effects of the financial crisis, but of that total, $35 trillion, or nearly half, was racked up by China alone.

August 2009

By August 2009, the Chinese government had launched an aggressive spending and lending program that kept China's GDP growth above 8%, while the US and Europe were in recession.  That steadily high GDP growth had convinced many Chinese that their government could produce any growth rate it wanted.

Bank regulators were the only officials who expressed alarm and their main concern was increasingly reckless lending in the private sector.  "Shadow banks" had started to appear, selling credit products with yields that were too high to be true.  

2013

By 2013, shadow banks accounted for half of the trillions of dollars in new yearly credit flows in China.  When Beijing began to limit borrowing by local governments, local authorities set up shell companies to borrow from shadow banks.  Soon these "local government funding vehicles" became the biggest debtors in the shadow banking system.

As the flow of debt accelerated, more lending went to wasteful projects.  By some estimates, 10% of the firms on the mainland stock exchange were "zombie companies." kept alive by government loans.  The state doled out loans to incompetent and failing borrowers.

• Lending started to flow into real estate

Much of the lending started to flow into real estate, the worst target for investment binges.  Easy loans spurred the sale of about 800 million square feet of real estate in 2010, more than in all other market so the world combined.  In big cities, prices were rising at 20% to 30% a year.

Caught up in the excitement, banks stopped looking at whether borrowers had income and started lending on collateral - often property.  This "collateralized lending" works only as long as borrowers short on income can keep making loan payments by borrowing against the rising price of their property.  By 2013, a third of the new loans in China were gong to pay off old loans.  In October 2013, Bank of China chairman warned that shadow banking resembled a "Ponzi scheme," with more and more loans based on "empty real estate."

• At the March 2013 party congress, Li Keqiang came in as prime minister.  

He was one of the Chinese leaders who appeared to accept the reality that a maturing economy needed to slow down, which would allow him to restrain the credit boom.  Yet every time the economy showed signs of slowing, the government would reopen the credit spigot to revive it.

• Dubious creditors grew

The cast of dubious creditors grew increasingly flaky, including coal and steel companies with no experience in finance, guaranteeing billions of dollars in IOUs issued by their clients and partners.  

2014: Chinese urged to buy stocks

By 2014, lending entrepreneurs were shifting their sights from property to new markets - including the stock market.

Even the state-controlled media jumped in the game, urging ordinary Chinese to buy stocks for patriotic reasons.  Their hope was to create a steady bull market and provide debt-laden state companies with a new source of funding.  Instead they got one of the biggest stock bubbles in history.

There are 4 basic signs of a stock bubble:  

• high levels of borrowing for stock purchases; 
• prices rising at a pace that can't be justified by the underlying rate of economic growth; 
• overtrading by retail investors and 
• exorbitant valuation.  

June 2015, Shanghai market started to crash

By April 2015, when the state-run People's Daily crowed that the good times were "just beginning,"  The Shanghai market had reached the extreme end of all four bubble metrics, which is rare.

The amount that Chinese investors borrowed to buy stock had set a world record, equal to 9% of the total value of tradable stocks.  Stock prices were up 70% in just 6 months, despite slowing growth in the economy.  On some days, more stock was changing hands in China than in all other stock markets combined.  In June 2015, the market started to crash and it continued to crash despite government orders to investors not to sell.

[Comments:

This credit binge had some characteristics unique to China's state-run system, including the borrowing by local government fronts and the Communist propaganda cheering on a capitalist bubble.  But its fundamental dynamics were typical of debt mania.  It began with private players, who assume the government would not let them fail, and devolved into a game of whack-a-mole.  As the government fitfully tried to contain the mania, more and more dubious lenders and borrowers got in the game, blowing bubbles in stocks and real estate.  The quality of credit deteriorated sharply, into collateralized loans and IOUs.  These are all important mania warning signals.

The most important sign was, as ever, private credit growing much faster than the economy.   After holding steady before 2008, the debt burden exploded over the next 5 years, increasing by 74 % points as a share of GDP.  This was the largest credit boom ever recorded int he emerging world (though Ireland and Spain have outdone it in the developed world).]

By mid 2019

By mid-2019 China had, in fact, seen economic growth slow by nearly half, from double digits to 6%, right in line with previous extreme binges.  To date then, no country has escaped this rule:  a five-year increase in the ratio of private credit to GDP that is more than 40% points has always led to a sharp slowdown in economic growth.

[Comments:

China did however, dodge the less consistent threat of a financial crisis, aided by some unexpected strengths.  One was the dazzling boom in its tech sector, without which the economy would have slowed much more dramatically.  Another was the fact that Chinese borrowers were in debt mainly to Chinese lenders and in many cases the state owned bother parties to the loan.  In short, /China was well positioned to forgive or roll over its own debts.  And with strong export income, vast foreign exchange reserves, strong domestic savings and still ample bank deposits, it has managed to avert the financial crisis that often accompanies large, debt driven economic slowdowns.]

How Paying Off Debt Pays Off

Before 2000

Before 2000, many emerging countries had never seen a period of real financial stability or a healthy credit boom.  

• Inflation was high and volatile, and when prices for big-ticket items are unpredictable, banks won't dare make loans that extend for more than a few months.
• In emerging countries, five-year car loan and the 30 year mortgage, had been unimaginable luxuries.  Yet, these are the many cornerstones of American consumer culture and middle-class existence.

After 2000

The new generation of emerging world leaders began controlling deficits and lowering inflation.  This newly stable environment quickly led to a revolution in lending.  

• Credit cards and corporate bonds were introduced for the first time.
• Mortgages, which barely existed in 2000, became a multibillion-dollar industry, rising from 0% of GDP to 7% in Brazil and Turkey, 4% in Russia and 3% in Indonesia by 2013.

For countries where people cannot buy a car or a house unless they amass enough cash, the introduction of these simple credit products is an important step into the modern world.

Periods of healthy credit growth

Periods of healthy credit growth bear no psychological resemblance to the extreme exuberance of manias or the extreme caution of debt-phobia.  

In place of shady lenders and unqualified borrowers, responsible lenders are widening the choice of solid loan options, creating a more balanced economy.

Global financial crisis in 2008

When the global financial crisis hit in 2008, countries like the US were vulnerable because they had been running up debt too fast.  

In Southeast Asia, however, the opposite story was unfolding.

Indonesia, Thailand, Malaysia and the Philippines had manageable debt burdens and strong banks ready to lend, with total loans less than 80% of deposits.  

Over the next 5 years the health of the credit system would prove crucial:  

• nations such as Spain and Greece, which had seen the sharpest increase in debt before 2008,  would post the slowest growth after the crisis; 
• nations such as the Philippines and Thailand, which had seen the smallest in debt during the boom, would fare the best.

Debt Mania and Debt Phobia

Debts owed by nations

Every new crisis seemed to hatch a new way of thinking about debt, depending on who is lending, who is borrowing, for how long, and many other factors.

• Mexico's "tequila crisis" of the mid-1990s started with short-term bonds.  This led to focus on the dangers of short-term debt.
• The Asian financial crisis started with debt to foreigners, and foreign loans became the new obsession.

The best predictor of these meltdowns:  five straight years of rapid growth in private-sector debt.  

A decade after the global financial crisis, the Bank of International Settlements, the IMF and other international authorities concurred the most consistent precursor of major credit crises going back to the "tulip mania" in 17th century Holland was that private-sector debt - borrowing by corporations and individuals - had been growing faster than the economy for a significant length of time.

The authorities also reached another surprising conclusion:  the clearest signal of coming trouble is the pace of increase in debt, not the size of the debt.  

• Size matters, but pace matters more.  
• Government debt play a role but usually rises later, after trouble starts in the private sector.  
• A sharp increase in private debt is the leading indicator.

The key issue is whether debt is growing faster or slower than the economy.   

• A country in which private credit has been growing much faster than the economy for 5 years should be placed on watch for a sharp slowdown in the economy and possibly for a financial crisis as well.

Thailand in 1997

From the prime minister to farmers gets swept up in the mania for cheap loans. 

A housewife borrows to invest in "four million of anything."  

By 1997, private debt amounted to 165% of GDP in Thailand, but debts of that size would not necessarily have signaled a crisis if the debt had not been growing at an unsustainable pace.

• Over the previous 5 years, private debt had been growing at an annual pace more than twice as fast as the roaring Thai economy and had rise by 67% points as a share of GDP.  

To anticipate coming trouble, the number to watch:  the five-year increase in the ratio of private credit to GDP.

Successful nations avoid debt manias

Successful nations avoid debt manias and are often best positioned for sustained growth after a period of retrenchment.  

• The upside to the rule is that if private credit has been growing much slower than the economy for 5 years, the economy could be headed for recovery, because banks will have rebuilt deposits and will feel comfortable lending again.  
• Borrowers, having reduced their debt burden, will feel comfortable borrowing again.  

That is the normal cycle anyway. 

Debt phobia can be almost as destructive

 After particularly severe credit crises, lenders and borrowers may be paralyzed for years by debt phobia, which can be almost as destructive as debt mania.

Political revolt and Food prices

There is never one cause of a political revolt, but food prices have played a role in many.  

Consumer prices have been intimately connected to the cycle of political crisis, revolt and reform.

1.  The Revolutions of 1848 targeted European monarchies and followed the spread of democratic ideas on the continent.  Spiking food prices was identified as the main catalyst too.

2.  In recent decades, Latin America has been a cauldron of inflation driven unrest.  Between 1946 and 1983, 15 governments fell in Latin America, and in 13 of those cases, from Mexico to Argentina, the regime change followed a sure in the annual rate of consumer price inflation to 20% or more.

3.  Rising prices for wheat and other grains also contributed to the 1989 fall of Communism in the Soviet Union.

Inflation fell in most emerging nations but occasional flare-ups continued to topple leaders.  

There was a strong link between food prices and unrest in many countries between 1990 and 2011.

1.  Inflation helped oust regimes in Brazil, Turkey and Russia (again) in the late 1990s.

2.  In 2008, World Bank warned that at least 33 countries faced a risk of social revolt sparked by food prices, which had risen 80% in the previous 3 years.

3.  Food prices did help spark revolts worldwide in 2011, including the Arab Spring.  

4.  In India before the 2013 election, the voters were complaining about price of onions.  The Congress Party lost to Modi's Hindu nationalist party, and polls showed that inflation had played a major role in the Congress government's downfall.

Conclusion:

High or rapidly rising consumer price inflation threatens economic growth directly and indirectly, because it can provoke destabilising social unrest.  

Watch for leaders who understand this inflation threat, and how to use the weapons that can control it.

High inflation for consumer prices is almost always a threat to growth but deflation is not.

For the eight centuries beginning in 1210, the world's average annual inflation rate was only 1%, according to the Global Financial Database.  For  most of that period, however, the long-term 1% average concealed sharp swings between inflation and deflation.

In early 1930s, deflation disappeared, for reasons that remain mysterious but include the spread of the banking industry and the wider availability of credit, with consequently more money chasing the available goods.

The end of the gold standard in the 1970s made it easier for central banks to print money, which also tends to fuel inflation.

The result was that deflation disappeared completely on the global level, and bouts of deflation - particularly longer ones - became much less common within individual nations as well.  

Though deflation has largely vanished, worldwide, it continues to surface in isolated pockets.  

Japan is the only major country to have suffered a multiyear case of deflation in the postwar era, but many countries have suffered a single-year bout.  

Again, however, these periods did not have a consistent impact on growth, for better or worse.

No clear evidence that consumer price deflation is bad - or good- for economic growth.

In early 2015, the Bank for International Settlements (BIS) looked at the postwar record for 38 countries.  In all, these countries had seen more than 100 years in which prices fell.  

• On average, GDP growth was higher by a statistically insignificant margin during deflationary years, at 3.2%, than during inflationary years, at 2.7%.   
• The cases in which deflation was accompanied by strong growth occurred from Thailand and China to the Netherlands and Japan.  

The BIS concluded there is no clear evidence that consumer price deflation is bad - or good- for economic growth.

High inflation for consumer prices is almost always a threat to growth but deflation is not.

How can you tell when consumer price deflation is the good kind, driven by growing supply, or the bad kind, driven by shrinking demand?  

This task requires parsing conflicting forces of supply and demand, often with unclear results.  

The takeaway is simply that while many analysts now assume that any hint of deflation is worrisome, this assumption is not borne out by the evidence.  

High inflation for consumer prices is almost always a threat to growth but deflation is not.

How to identify potentially threatening asset price bubbles?

In a globalized world, with few barriers to capital flows, investors around the world can bid up prices for stocks, bonds and real estate in local markets from New York to Shanghai.  

Central banks have fueled these purchases with record low interest rates and by entering the bond market as major buyers themselves  

Largely as a result, global financial assets (including only stocks and bonds) are worth $280 trillion and amount to about 330% of global GDP, up from $12 trillion and just 110% in 1980.

Traditionally, economists have looked for trouble in the economy to cause trouble in the markets.  

They see no cause for concern when loose financial policy is inflating prices in the markets, as long as consumer prices remain quiet.  

Even conservatives who worry about easy money "blowing bubbles" still look mainly for economic threats to the financial markets, rather than the threat that overgrown markets pose to the economy.   

But financial markets are now so large, that the tail wags the dog.

A market downturn can easily trigger the next big economic downturn.

Summary:

The general rule is that strong growth is most likely to continue if consumer prices are rising slowly, or even if they are falling as the result of good deflation, driven by strengthening supply network.

In today's globalized economy, in which cross-border competition tends to suppress prices for consumer goods but drive them up for financial assets, watching consumer prices is not enough.  

Increasingly, recessions follow instability in the financial market.  

To understand how inflation is likely to impact economic growth,  keep an eye on stock and house prices too.

Housing bubbles and Stock bubbles fueled by borrowings

Be alert when prices are rising at a pace faster than underlying economic growth for an extended period, particularly for housing.  

• Home prices typically rise by about 5% a year.  
• This pace speeds up to between 10% and 12% in the two years before a period of financial distress.
• Once prices for stocks or housing rise sharply above their long-term trend, a subsequent drop in prices of 15% or more signals that the economy is due to face significant pain.  

In general, housing bubbles were much less common than stock bubbles but were much more likely to be followed by a recession.  The downturn is much more severe if borrowing fuels the bubble.  

• When a recession follows a bubble that is not fueled by debt, 5 years later the economy will be 1% to 1.5% smaller than it would have been if the bubble had never occurred.
• If the investors borrow heavily to buy stock, the economy 5 years later will be 4% smaller.
• If they borrow to purchase housing, the economy will be as much as 9% smaller.

Growing threat of Asset bubbles

Globalization

Rising global competition and the emergence of independent central banks have helped countries contain consumer prices.  But globalization is pushing asset prices in the opposite direction.

In a world with few barriers to the flow of capital, foreigners are often the main buyers of stocks, bonds and real estate in markets from New York to Seoul, making prices for these assets less stable, and an increasingly telling signal of a coming economic crash.

Debt-fueled property booms and recessions

Many postwar economic "miracles," ranging from Italy and Japan in the 1950s to Latin America and Southeast Asia later, first took off because of strong fundamentals (like strong investment and low inflation) but were sustained by rapidly rising debts and ended with a bursting property bubble.

In recent decades, recessions have been more likely to originate in debt-fueled property booms, for the simple reason that there has been an explosion in mortgage finance.  Since the boom in modern finance began in the late nineteenth century, mortgage lending has grown much faster than other lending to households and private companies, which helps explain why economic booms and busts "seem to be increasingly shaped by the dynamics of mortgage credit."

The growing threat posed by asset bubbles

Before World War II, there were 78 recessions - including only 19 that followed a bubble in stocks or housing.  

After the war, there were 88 recessions, the vast majority of which, 62, followed a stock or housing bubble.

For the last 3 decades, every major economic shock has been preceded by a bubble in housing, stocks or both, including 

• Japan's meltdown in 1990, 
• the Asian financial crisis of 1997 - 1998, 
• the dot-com crash of 2000-2001, and, of course, 
• the global financial crisis of 2008.  

Asset price crashes can trigger bad consumer price deflation

Often, a crash in prices of houses or stocks will depress the economy, by making people feel suddenly less wealthy.  Thus shaken, they spend less, resulting in lower demand and a fall in consumer prices.  In other words, asset price crashes can trigger bouts of bad consumer price deflation.  

• This is what happened in Japan, where the real estate and stock crash of 1990 led to the long fall in both asset and consumer prices. 
• It also happened in the US, where the stock crash of 1929 was followed by consumer price deflation in the early years of the Great Depression.

Understanding Real Inflation Threats

When may inflation be too high?

These are still very useful averages as benchmarks for judging when inflation may be too high:

• Any emerging nation with a rate of inflation much above 4%, or 
• any developed nation with a rate much above 2%.

Any country with high inflation has cause for concern.

High consumer price inflation is a growth-killing cancer.  

This still holds true.  

• In the short-term, rapidly rising prices compel central banks to raise interest rates, making it more expensive for businesses and consumers to borrow.  High inflation also tends to be volatile, and its swings make it impossible for businesses to plan and invest for the future.   
• Over the longer term, inflation erodes the value of money sitting in the bank or in bonds, thus discouraging saving and shrinking the pool of money available to invest in future growth.

Actions of central banks post crisis of 2008

In the slow growth-environment that took hold after the crisis of 2008, central banks often worry that inflation may be too low, not too high.

In developed countries, instead of raising rates to make sure inflation doesn't increase to far above a target of 2%, they now cut interest rates when inflation is falling too far below 2%.  

Their big fear is that low inflation will lead to outright deflation - the dreaded but overblow "Japan scenario".

"Bad deflation" and "Good deflation"

History, in fact, shows that neither low inflation nor deflation are necessarily bad for economic growth.   

Japan suffered a rare bout of "bad deflation" after the collapse of its stock and housing bubbles in 1990.  Consumer demand dried up, prices started to fall and shoppers began delaying purchases in the expectation that prices would fall further.  The downward spiral depressed growth for 2 decades.  

However, deflation can also follow a new tech or financial innovation that lowers production costs and boosts economic growth.

If inflation is too high, it is almost always a threat to growth but the same cannot be said of low inflation.  Even if low inflation threatens to devolve into deflation, it could be good for growth if falling prices are driven by new innovation and expanding supply rather than by depressed demand.

Need to control inflation in both consumer markets and financial market

Perhaps, the deepest flaw in traditional thinking, however, is that it still focuses on the kind of inflation that has largely disappeared.   

• After the central banks won the war on high consumer price inflation, they cut interest rates to levels that have fueled a massive run-up in prices for financial assets, including stocks, bonds, and houses.  
• And in recent decades, as we have seen, stock market and housing bubbles have been increasingly common precursors to financial crisis and recessions. 

Traditional thinking fails to recognize the new inflation threat in the financial market

Economists have been very slow to recognize this new inflation threat, and central banks have been very slow to think outside their official mandates, which focus on stabilising the economy by controlling inflation in consumer prices only.  

But successful nations will control both kinds of inflation, in consumer markets and in financial market.

No subject in economics is more paralyzed by traditional thinking than inflation, a term that generally refers only to the pace of increase in consumer prices, a once ubiquitous threat that has largely vanished in recent decades.  

Central bankers and economists still tend to focus on consumer price inflation, even though it has largely disappeared and to ignore prices for assets like stocks, bonds and real estate, even though there is an increasingly clear link between real estate and stock market busts and economic downturns.

Successful Nations Invest Heavily and Wisely

The most basic formula in economics

GDP is the sum of spending by consumers and government plus investment and net exports.

GDP = (C+G) + (I+X)

Investment (I) reveals the most about where the economy is heading.  Without investment, there would be no money for government and consumers to spend.  Investment includes total investment by both the government and private business.    Investment helps create the new businesses and jobs that put money in consumers' pockets.

Consumption is typically by far the largest share of the spending in the economy - more than half.  Investment is usually much smaller, around 20% of GDP in developed economies and 25% in developing economies, give or take.

Investment is the most important indicator of change

Investment is by far the most important indicator of change, because booms or busts in investment typically drive recessions and recoveries.  In the U.S., investment is 6 times more volatile than consumption, and during a typical recession it contracts by more than 10%, while growth in consumer spending merely slows down.

Successful nations versus those facing weak prospects

In successful nations, investment is generally rising as a share of the economy.  When investment is rising , economic growth is much more likely to accelerate.

Any emerging country is generally in a strong position to grow rapidly when investment is high - roughly between 25% and 35% of GDP - and rising.

On the other hand, economies face weak prospects when investment is low, roughly 20% of GDP or less - and falling.   

Much of what makes the emerging world feel chaotic reflects a shortage of investment in the basics.  

In developed economies, investment spending tends to be lower because basic infrastructure is already built.  So pay less attention to the level of spending as a share of GDP and more to whether is is rising or falling.   

Strong growth in investment is almost always a good sign, but the stronger it gets, the more important it is to track where the spending is going.  

Good and bad investment binges.

The best binges unfold when companies funnel money into projects that fuel growth in the future:  new technology, new roads and ports, or especially, new factories.  

Of the 3 main economic sectors - agriculture, services and manufacturing - manufacturing has been the ticket out of poverty for many countries.    

No other sector has the proven ability to play the booster role of job creation and economic growth that manufacturing has in the past.

As a nation develops, investment and manufacturing both account for a shrinking share of the economy, but they continue to play an outsize role in driving growth. 

An investment binge can be judged by what it leaves behind.  

Following a good binge on manufacturing, technology, or infrastructure, the country finds itself with new cement factories, fiber-optic cables, or rail lines, which will help the economy grow as it recovers.  

Bad binges - in commodities or real estate - often leave behind trouble.

• Investment does little to raise productivity when it goes into real estate, which has other risks as well:  it is often financed by heavy debts that can drag down the economy.   
• When money flows into commodities like oil, it tends to chase rising prices and evaporate without a trace as prices collapse.  

So, while investment booms are often a good sign, it matters a great deal where the money is going.

 

Capital flows in a Globalized World

Countries need foreign currency to pay their import bills.   

They can obtain these from:

- foreign bank loans,

- foreign purchases of stocks or bonds of their countries, or,

- direct foreign investment in local factories.

These flows all are recorded in the capital account of the balance of payments.

Analysts and newspaper headlines tend to focus only on foreign purchases of stocks and bonds.  These are often called "hot money" because foreigners looking for a quick profit can dump stocks and bonds like hot potatoes when crises begin.

Bank loans:  the real hot money 

In recent decades, the most volatile capital flows have actually been bank loans, which are now the real hot money.

China and other emerging markets began opening their doors to foreign capital.  Capital flows rose from 2% of global GDP in 1980 to 16% (a whopping $19 trillion) by early 2007.

Then came the 2008 crisis and optimism about emerging nations vanished. 

By 2014, capital flows had fallen back to $1.2 trillion - once again about 2% of current global GDP.  , Bank lending, the largest portion of capital flows, turned negative during the crisis, indicating that banks were liquidating loans to bring money home.

When capital flows slowed

With capital flows slowing, those countries with persistent current account deficits may run into trouble financing these deficits much sooner.

In the pre-2008 era, the tipping point came when the deficit had been increasing by 5% of GDP for five years in a row.  

In the post-crisis era, the tipping point may come faster and at a lower deficit levels; the 5 percent rule may become a 3% rule.

How to read Money Flows: Study the Balance of Payments, especially the Current Account

Money flows

If the currency feels cheap and the economy is healthy, bargain hunters will pour money in it.

If the currency feels cheap but money is still fleeing, something is wrong.#

Study the balance of payments, particularly the current account

All the legal channels for money flows can be found in the balance of payments, particularly the current account.  

Current account = net trade (mainly) + other foreign income.

The current account captures how much a nation is producing compared to how much it is consuming and it reveals how much a nation has to borrow from abroad to finance its consumption habits.  

If a country runs a sizable deficit in the current account for too long, it is going to amass obligations it cannot pay.  The trick is to identify the tipping point.

Persistently high current account deficit leads to economic slowdown

Testing for various sizes of deficits, over various time periods, confirmed that when the current account deficit runs persistently high, the normal outcome is an economic slowdown.  

If the deficit averages between 2% and 4% of GDP each year over a five-year period, the slow-down is relatively mild.  

If the deficit averages 5% or more, the slowdown is sharper, shaving an average of 2.5% points off the GDP growth rate over the following five years.  

The growth slowdown hit countries rich and poor.  

This is the danger zone

If a country runs a current account deficit as high as 5% of GDP each year for five years, it is consuming more than it is producing and more than it can afford.

Running sustained current account deficits of more than 3% or 4% of GDP can also signal coming economic and financial trouble - just less urgently.

In fact, some emerging-world officials have come to believe that when the current account deficit hits 3% of GDP, it is time to restrain consumer spending and prevent the country from living beyond its means.

Below the 3% threshold, a persistent current account deficit may not be a bad thing.  

• If money is flowing out of the country to import luxury goods, which do not fuel future growth, it will be harder for the country to pay the import bills.  
• If it is going to buy imports of factory machinery, the loans financing those purchases are supporting productive investment in future growth.

One quick way to determine whether the rising deficit is a bad sign is to check whether investment is rising as a share of GDP.   Such a rise at least suggests that money is not flowing out for frivolous consumption.

Appendix:

# In late 2014, the Russian ruble collapsed because of the falling price of oil.  Russians were still pulling tens of billions of dollars out of the c0untry every month, fearing that the situation would get worse.  Cheap was not yet a good sign, because the ruble was not yet cheap and stable.

Summary

The article's key points:

To understand money flows, focus on studying the balance of payments, especially the current account.

The current account reflects a nation's production versus consumption and reveals how much it borrows from abroad.

Persistent high current account deficits lead to economic slowdowns.

Deficits between 2% and 4% of GDP cause milder slowdowns; deficits of 5% or more cause sharper slowdowns.

Running deficits above 3% or 4% of GDP can signal economic trouble.

When a country has a 5% GDP deficit for five years, it is living beyond its means.

For deficits below 3%, it depends on whether the money is invested productively or wasted on non-essential imports.

Appendix: In 2014, the Russian ruble collapsed due to falling oil prices, and money continued to leave the country, showing that cheapness of currency wasn't a positive sign until it stabilized.

"In valuing currencies, nothing works." Why "FEEL" is the Best Measure.

Formal measures of valuing currencies are open to manipulation by politicians

The more formal measures are open to manipulation by politicians, who can make their currency, and thus their country, look competitive by cherry-picking data.  

To accurately value currencies, one has to correct for different inflation rates.  

• One common measure, the real effective exchange rate (REER), corrects for consumer price inflation in a country's major trading partners.  
• Competing measures correct for producer prices, labour costs, or per capita income.  
• The results, however, are often contradictory.  

The Economist's Big Mac Index

To improve clarity, experts have attempted to rank how expensive countries are by comparing prices for common items.   

• The granddaddy of these rankings is the Economist's Big Mac Index.  
• Others compare prices for Starbuck coffee, iPhones and other goods.  

All these approaches acknowledge that the only way to value a national currency is by how cheap it feels to buy goods in that country.

Judging a currency by how cheap it "feels" may sound vague, but there is no better way.  

In the absence of an accurate measure, outsiders need to trust that they will know an expensive currency when they feel it.  Of course, the feel of a currency will vary with the traveler. 

• Brazil may feel less expensive to Americans paying in dollars than to Europeans paying in euros.  
• In general, though a rising currency tends to be rising against most major currencies and the currency that matters most is the US dollar.

Is a strong currency a sign of a strong economy? Are we overlooking the risks of a strong currency?

1.   If currency starts appreciating too fast, foreigners will start buying local stocks or bonds not because they believe in the economy, but because they believe the rising currency will increase the US dollar value of those investments.  

2.  For a while this bet is self-fulfilling, as foreign money continues to drive up the value of the local currency.

3.  Eventually, though, an expensive currency makes the country's exports too pricey to compete in global markets.  

4.  The economy stalls, the currency crashes, and the country will be poised to grow only when it stabilizes again, at a competitive value.  

Summary

A cheap currency is good.  A currency that makes local prices feel affordable will draw money into the economy through exports, tourism and other channels.

An overpriced currency will encourage both locals and foreigners to move money out of the country, eventually sapping economic growth.

Successful nations feel cheap, at least to foreign visitors.  (The cars of some developed countries are so cheap relative to those of Malaysia.  The food and personal wears of some developed countries are so cheap relative to their incomes and also for visiting Malaysians too.)

Berkshire Tops Morningstar List of Blue-Chip Stocks

Berkshire Tops Morningstar List of Blue-Chip Stocks

Warren Buffett's Berkshire Hathaway has generated an annualized return of 11.33% over the past five years.

When building your stock portfolio, it’s a good idea to start with blue-chip stocks, many experts agree.

And why is that? “Blue-chip stocks are from companies that are large, well-established, and financially sound,” writes Morningstar investment specialist Susan Dziubinski.

“These companies are leaders in their industries, with strong brand names and reputations, and they generate dependable earnings. Blue-chip stocks usually boast consistent dividends and are often considered to be less risky, given the financial stability of these companies.”

Morningstar put together a list of the best 10 blue-chip stocks to buy for the long term. As for criteria to make the list, one is membership in Morningstar’s roster of the Best Companies to Own for 2023.

“Companies on this list have wide Morningstar moat ratings and predictable cash flows,” Dziubinski said. A wide moat means Morningstar sees the company with competitive advantages for 20 years or more.

Also, the companies are “run by management teams that make smart capital-allocation decisions,” she said. And the stocks are undervalued compared to Morningstar’s fair value estimates. They have market capitalizations over $100 billion as well.

Morningstar's Top 10

Here’s the roster. The stocks were all at least 10% undervalued as of June 2.

1. Berkshire Hathaway  (BRK.B) - Get Free Report, Warren Buffett’s conglomerate. Morningstar fair value: $370. Friday’s close: $335.

“Berkshire, owing to its diversification and its lower overall risk, offers one of the better risk-adjusted return profiles in the financial-services sector,” wrote Morningstar analyst Greggory Warren. “And it remains a generally solid candidate for downside protection during market selloffs.”

2. Taiwan Semiconductor Manufacturing  (TSM) - Get Free Report, the chip giant. Morningstar fair value: $139. Friday’s close $103.

“TSMC is a significant beneficiary of high performance computing, with upside-surprise potential from generative artificial intelligence,” wrote Morningstar analyst Phelix Lee. “Confidence in its long-term outlook has been renewed by its resilient capital spending budget.”

3. Roche  (RHHBY) , the big Swiss drug company. Morningstar fair value: $57. Friday’s close: $39.

“Roche's drug portfolio and industry-leading diagnostics conspire to create maintainable competitive advantages,” wrote Morningstar analyst Karen Andersen. It’s “in a unique position to guide global health care into a safer, more personalized, and more cost-effective endeavor.”

4. Bank of America  (BAC) - Get Free Report, the money-center bank. Morningstar fair value: $37. Friday’s close: $29.

“Bank of America reported decent first-quarter results, showing that the bank’s deposit base and funding costs are tracking roughly as would have been expected, even before the Silicon Valley Bank implosion,” wrote Morningstar analyst Eric Compton.”

5. Pfizer  (PFE) - Get Free Report, the pharmaceutical stalwart. Morningstar fair value: $48. Friday’s close: $39.

6. Cisco Systems  (CSCO) - Get Free Report, the provider of network technology. Morningstar fair value: $56. Friday’s close: $50.

7. Thermo Fisher Scientific  (TMO) - Get Free Report, the science equipment provider. Morningstar fair value: $590. Friday’s close: $518.

8. Comcast  (CMCSA) - Get Free Report, the media/telecommunications/entertainment titan. Morningstar fair value: $60. Friday’s close: $40.

9. Wells Fargo  (WFC) - Get Free Report, the big bank. Morningstar fair value: $58. Friday’s close: $42.

10. Honeywell International  (HON) - Get Free Report, the industrial conglomerate. Morningstar fair value: $225. Friday’s close: $198.

BY DAN WEIL

Dan is a freelance writer whose work has appeared in The Wall Street Journal, Barron's, Institutional Investor, The Washington Post and other publications.

https://www.thestreet.com/investors/berkshire-morningstar-blue-chip-stocks

In Malaysia, you just need RM2.2m in wealth to join top ‘one-percenter’ club unlike Singapore’s RM16.1m

Publish date: Tue, 30 May 2023, 07:31 PM

KUALA LUMPUR, May 30 — How much do you need to be in the top 1 per cent of your country’s population in terms of wealth?

Just US$485,000 (or over RM2.2 million using today’s currency rates) in net wealth in Malaysia is all it takes for you to be categorised as the richest one per cent here, or to be richer than 99 per cent of the Malaysian population, according to property consultancy Knight Frank’s latest report.

This US$485,000 level in Malaysia is far lower than the US$3.5 million (over RM16.1 million) minimum wealth you need to have in Singapore, before you can be categorised as richer than the remaining 99 per cent of Singapore’s population.

According to Knight Frank’s latest edition of its The Wealth Report (Wealth Sizing Model), its own definition of an ultra-high net worth individual (UHNWI) — someone who owns more than US$30 million wealth — actually requires greater wealth size compared to what is perceived as “the 1 per cent”.

“While ‘the 1 per cent’ might be thought of as the epitome of excess, the price of access to the club falls well short of our definition of a UHNWI — somebody whose net wealth exceeds US$30 million,” Knight Frank said in its report.

The Knight Frank report did not state the number of individuals in Malaysia who would meet the minimum US$485,000 (over RM2.2 million) needed to be among the country’s top one per cent of wealthy individuals.

However, the same report said the number of wealthy individuals has continued to grow in Malaysia, with those being high net worth individuals (HNWI) or owning over US$1 million (more than RM4.6 million with today’s currency rates) numbering 58,395 persons in 2017, before growing to 66,682 in 2021 and to 85,126 in 2022.

In 2017, there were 491 persons in Malaysia in the UHNWI category or owning more than US$30 million wealth (over RM138 million) each; this number grew to 659 persons in 2021 and 721 persons in 2022.

If the numbers for HNWI and UHNWI are combined, there would be at least 85,847 individuals in Malaysia in the top “1 per cent” club in terms of wealth in 2022.

The latest official statistics from the Department of Statistics Malaysia as of May 11 show that the Malaysian population is estimated to number 33.2 million, comprising 30.4 million citizens and 2.8 million non-citizens.

Where is it ‘cheaper’ to be a ‘one percenter’?

During the global financial crisis, attention turned to terms such as “the 1 per cent” which were deemed as the richest of the rich with wealth concentrated in their hands, to emphasise the wealth inequality with the remaining 99 per cent of the population.

Despite that, the amount of wealth you need to own to be in the top wealthiest category of one per cent will depend on which country you are in, but it will actually be much lower than US$30 million.

Even in glitzy Monaco which has the world’s highest concentration of super-rich individuals, all you need is US$12.4 million in wealth to join its top one per cent of the population in terms of wealth.

Switzerland has the second-highest level of wealth required to be in “the 1 per cent” segment at US$6.6 million, followed by Australia (US$5.5 million), New Zealand (US$5.2 million), the US (US$5.1 million) and Ireland (US$4.3 million).

The next highest ones are Singapore (the highest in Asia) and France with a minimum of US$3.5 million required, Hong Kong (US$3.4 million), the UK (US$3.3 million), Italy (US$2.6 million), Spain (US$2.5 million), Japan (US$1.7 million), UAE (US$1.6 million), Chinese mainland (US$960,000), Czech Republic (US$880,000), Saudi Arabia (US$740,000), Romania (US$587,000).

While Malaysia has a relatively low entry point for the “1 per cent club” at US$485,000, the levels are lower in other countries like Brazil (US$433,000), Mexico (US$383,000), India (US$175,000), South Africa (US$109,000), the Philippines (US$57,000) and Kenya (US$20,000), the list in Knight Frank’s report shows.

“All of these levels have risen since we last published the analysis in The Wealth Report 2021 reflecting the growth in wealth over the past two years, despite the dip in 2022.

“However, as explored in that edition, growing inequality globally could see a greater focus on this group — particularly in the sights for greater taxation on assets and even emissions,” Knight Frank said in its report.

 

https://www.malaymail.com/news/malaysia/2023/05/30/in-malaysia-you-just-need-rm22m-in-wealth-to-join-top-one-percenter-club-unlike-singapores-rm161m/71679

PRESS RELEASE BY PUBLIC BANK BERHAD FIRST QUARTER 2023 FINANCIAL PERFORMANCE

PUBLIC BANK GROUP ACHIEVED PRE-TAX PROFIT OF RM2.21

BILLION FOR THE FIRST QUARTER OF 2023

For the first quarter ended 31 March 2023, the Public Bank Group

recorded pre-tax profit growth of 10.4% to RM2.21 billion, as compared

with the corresponding quarter in 2022. Net profit grew at a higher rate of

22.6% to RM1.71 billion during the same period, due to the prosperity tax

imposed in the previous corresponding period.

Tan Sri Dato’ Sri Dr. Tay Ah Lek, Managing Director and Chief Executive

Officer of Public Bank commented, “The Public Bank Group continued

to navigate through the challenges in the evolving operating

environment and demonstrated resilience in its first quarter 2023

performance, which was mainly supported by commendable net

interest income growth and lower loan impairment allowances.”

Net interest income increased by 7.4%, mainly led by healthy loans and

deposits growth which expanded at an annualised growth rate of 5.0%

and 9.1% respectively. Coupled with lower impairment allowances during

the quarter, the Group sustained a resilient net return on equity of 13.6%.

Despite high inflationary pressure, increase in operating expenses was

well under control at 4.7%, underpinned by the Group’s prudent cost

management. As a result, the Group continued to achieve an efficient

cost-to-income ratio of 33.1% in the first quarter of 2023.

Asset quality remained stable with a low gross impaired loans ratio of

0.5%. Loan impairment allowances were lower by 98.5% to RM1.5 million

from RM99.7 million in the corresponding quarter of 2022.

Loans and Deposits Businesses

During the first quarter ended March 2023, the Public Bank Group

maintained a healthy loan growth momentum at an annualised growth

rate of 5.0% to RM381.6 billion, largely supported by the domestic loan

portfolios which grew by an annualised rate of 5.4% to RM356.8 billion.

Domestic loan growth was mainly contributed by residential properties

financing, hire purchase financing as well as SME financing, which grew

at an annualised rate of 6.1%, 11.5% and 2.7% respectively. This has

sustained the Group’s leading market share in the residential properties

financing, hire purchase financing and domestic SME lending, which

stood at 20.6%, 30.4% and 19.0% respectively.

The Group’s funding and liquidity position remained healthy, supported

by a commendable growth in customer deposits at an annualised rate of

9.1% to RM403.7 billion. Domestic deposits rose by 10.2% on an

annualised basis to RM376.5 billion, attributable to the consistent growth

in retail deposits.

Reflecting its healthy balance sheet, the Public Bank Group continued to

maintain a stable gross loan to fund and equity ratio of 80.4% as at the

end of March 2023.

Asset Quality

As at the end of March 2023, the Public Bank Group continued to achieve

and maintain sound and resilient asset quality as reflected in its low gross

impaired loans ratio of 0.5%, a level significantly lower than the domestic

banking industry’s average gross impaired loan ratio of 1.7%.

The Group’s loan loss coverage ratio stood comfortably at 217.8%, well

above the banking industry’s loan loss coverage ratio of 95.8%. Including

regulatory reserves, the Group’s loan loss coverage ratio was higher at

239.6%.

With the ongoing economic recovery, the Group has observed a stable

repayment trend from customers. However, amidst the expected

economic challenges in 2023, the Group will stay vigilant in managing its

loan portfolios and will continue to provide assistance to customers who

face repayment constraints.

Non-interest Income

In the first quarter of 2023, non-interest income increased marginally by

0.7% as compared with the corresponding quarter in 2022. The subdued

market conditions was cushioned by the Group’s higher foreign

exchange profit, stockbroking income as well as investment income.

The Public Bank Group’s unit trust business undertaken by its wholly

owned subsidiary, Public Mutual remained the main contributor to the

Group’s non-interest income. Public Mutual recorded a pre-tax profit of

RM192.6 million in the current quarter, contributing 8.7% to the Group’s

profit. With total assets under management of RM94.4 billion and 179

unit trust funds being managed, Public Mutual continued to capture a

large retail market share of 35.7% as at the end of March 2023.

Overseas Operations

In the first quarter of 2023, the Public Bank Group’s overseas operations

contributed 8.1% to the Group’s profit, mainly attributed to its Hong Kong

and Indochina operations.

Public Bank Vietnam and Cambodian Public Bank continued to deliver

strong profit performance, as reflected in the respective double-digit profit

growth of 24.5% and 59.8% year-on-year. Indochina will continue to be

the Group’s key focus growth area, with continued expansion of branch

network as well as broadening of products and services. The Group is

targeting to open another 8 new branches in Vietnam to reach a total of

40 branches by year end.

However, the operating environment for the Group’s Hong Kong

operations remain uncertain and challenging despite the lifting of COVID19 

containment measures.

Capital and Liquidity Position

As at the end of March 2023, the Group remained well capitalised with

common equity Tier 1 capital ratio, Tier 1 capital ratio and total capital

ratio standing at 14.6%, 14.7% and 17.7% respectively. Liquidity

coverage ratio also remained stable and healthy at 137.1%.

The Group’s capital and liquidity position has remained sound and is

resilient to any potential stress condition. The Group will continue to

manage its balance sheet prudently in pursuit of its banking business

growth.

Group’s Prospects

The heightened volatility in the financial markets and rising concerns

about the health of banking sectors across the United States and Europe

raise question on the potential risk of contagion effects. This is likely to

further exert downward pressure on the world economy which is already

bracing for a challenging 2023 due to elevated inflation, tightening

financial conditions and geopolitical tensions. Malaysia as an open

economy, will continue to face these headwinds.

Nevertheless, firm domestic demand underpinned by improved

employment market, multi-year investment projects, Government’s policy

measures and recovery in China’s economy will continue to support the

Malaysian economy on the positive growth trajectory, providing a stable

and conducive business environment for banking business growth.

Tan Sri Tay concluded, “The Public Bank Group is cognisant of the

prevailing challenges and evolving landscape. The Group will

remain focused on cost discipline, preservation of sound asset

quality and upholding strong corporate governance to safeguard its

resilience against adversity. Notwithstanding, the Group will

continue to take a proactive approach in embracing growth

opportunities arising from the growing economy, digital

transformation as well as the growing ESG demand.”

25 May 2023

For more information, please contact:

Ms Chang Siew Yen Ms Yik Sook Ling

Senior Chief Operating Officer Chief Financial Officer

Tel: (603) 2176 7461 Tel: (603) 2177 3310

Fax: (603) 2163 9925 Fax: (603) 2164 9002

Email: changsiewyen@publicbank.com.my Email: yiksookling@publicbank.com.my

https://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?id=136962&name=EA_GA_ATTACHMENTS

Malaysian Equity Market

 Equites

The fortunes of a country’s equity or stock market are closely aligned with its economic well-being, and Malaysia is no exception. Similar to its global peers, Bursa Malaysia been enduring much turbulence in the last few years. Buffeted by strong external and internal headwinds, the market capitalisation of the local bourse had moderated further to RM1.74 trillion as at end-2022 (end-2021: RM1.79 trillion).

Profile of Malaysian Equity Market

Bursa Malaysia has the distinction of being among the biggest bourses in ASEAN with well over 900 listed companies. Investors can choose from a variety of listed products, including equities, derivatives, exchange-traded funds (ETFs), real estate investment trusts (REITs), and exchange traded bonds and sukuk (ETBS). Notably, 789 (81.2%) of the 972 listed entities on the local bourse were Shariah-compliant securities as at end-December 2022. These accounted for RM1.139 trillion or 65.6% of Bursa Malaysia’s overall market capitalisation as at the same date. Despite the tumultuous global markets, a total of RM26.0 billion was raised from the Malaysian equity market in 2022. Of this amount, RM3.5 billion originated from the primary market, i.e., via 35 initial public offering (IPOs). The other RM22.6 billion stemmed from secondary fundraising. The sturdier performance in 2022 was driven by a 52% y-o-y surge in IPOs and a 58% spike in secondary issuances.

Three Types of Markets on Bursa Malaysia

Bursa Malaysia operates through three markets – the Main Market, the ACE Market and the LEAP Market. Each has a different set of listing criteria for aspiring candidates. The following represents some of the most salient points of the respective markets.  

The Main Market is the primary market for larger companies with strong operating and profit track records, with a minimum required market capitalisation of RM500 million upon listing, among other things.

The ACE Market is a sponsor-driven alternative market designed for smaller companies that exhibit strong growth potential. No minimum profit or operating track record is required for listing.

The LEAP Market is a fundraising platform for what are perceived as underserved SMEs, which do not need to demonstrate any operating or financial track record. This adviser-driven market is only available to sophisticated investors.

In 2022, the Main Market hosted the listing of five companies while the ACE Market welcomed 25 and the LEAP Market contributed another five – bringing the total to 35 IPOS for the year. Together, these newly listed entities raised RM3.49 billion.

Listing Process and Platforms

The listing process (from the time the candidate engages an adviser to the day of listing) usually takes four to nine months, depending on the structure and complexity of the listing scheme. Upon approval, the entity will be given six months to complete its IPO exercise.

Bursa Malaysia also offers an end-to-end Shariah-compliant investing platform, along with the world’s first end-to-end Shariah-compliant commodities-trading platform. In recognition of the importance of sustainable and responsible investment, Bursa Malaysia launched the FTSE4Good Index in 2014. This index permits investors to measure domestic companies’ performance based on ESG standards. In July 2021, the local bourse introduced the FTSE4Good Bursa Malaysia Shariah Index – the Shariah-compliant version of the former. This new index will assist fund managers to develop new investment products constituting a portfolio of Shariah-compliant equities, guided by sustainable investing principles.

Investor Profile

The Malaysian stock market benefits from a diverse pool of investors, underscored by sturdy support from local institutional and retail investors. Domestic institutions remained net sellers in 2022, to the tune of RM6.53 billion (2021: RM9.1 billion). Meanwhile, local retail investors infused RM2.31 billion of net funds into the equity market, which paled in comparison to the previous year’s RM12.2 billion. Interestingly, foreign investors pumped in RM4.40 billion net (2021: RM3.15 billion) after four consecutive years as net sellers. Against this backdrop, the participation rate of retail investors declined to an average of 25.7% in terms of transaction value, relative to 34.6% in 2021. Nonetheless, this is still higher than the five-year pre-pandemic average of 18.8%

Trading Procedures

To invest in shares in Malaysia, one must be over the age of 18, open a Central Depository System (CDS) account and a trading account at a stockbroking firm. There are specific steps to follow pursuant to this, as detailed on Bursa Malaysia’s website.

Regulatory System

The Securities Commission Malaysia (SC) is the ultimate regulator of the Malaysian capital markets, including the equity market. As the front-line regulator, Bursa Malaysia, is tasked with safeguarding a fair and orderly market for the trading of securities and derivatives. The SC supervises and monitors Bursa Malaysia on listing, trading, clearing, settlement, and depository operations – to ensure the latter effectively performs its regulatory duties and obligations. Brokers and regulated entities must comply with the various rules set by Bursa Malaysia.

https://www.capitalmarketsmalaysia.com/public-equities/

Most stocks end up losing you money. So what’s a stock-market investor to do?

Most stocks end up losing you money. So what’s a stock-market investor to do?

May 21, 2023 

By Brett Arends

If you’re going to try to retire early and rich by picking the right stocks, there’s something you should know first: Most stocks end up losing you money. 

Over the long term, a majority of stocks on the U.S. stock market have actually ended up as worse investments than keeping your money in low-risk 1-month Treasury bills. (Or savings accounts, or certificates of deposit.)

It’s easy to look at the fabulous wealth created by those who picked the big winners. We ignore at our peril all the losers.

Going all the way back to 1926, it turns out that a stunning 59% — roughly three out of five — of all the stocks ever quoted on the U.S. stock market have made their investors poorer. Yes, the stock market overall has gone up phenomenally since then. But all of the gains have come from those other 40%, or two out of five. And even among those “winners” most of the gains have come from a very few.

So reports Hendrik Bessembinder, a professor at Arizona State University’s W.P. Carey School of Business, in another of his landmark studies into stockholders’ returns. 

He’s crunched the numbers on 28,114 stocks ever traded on U.S. markets and tracked by the authoritative Center for Research in Security Prices, an affiliate of the University of Chicago.

Total wealth for stockholders over the entire period sums to $55 trillion, he calculates. But the winners, fewer than 12,000, accounted for … er … $64 trillion of that.

The other 16,000 stocks lost you $9 trillion, that means.

When you look closer at the numbers, it gets even crazier. Out of those 12,000 or so stocks that made you any money at all, nearly half — about 45% — of all the money created came from just 50 stocks.

Put another way, this means that the majority of stocks lost you money, and most of the rest made you bupkis. Just 0.17% of all stocks, or one in 562, accounted for about half of all the wealth ever created on the U.S. stock market.

How do you like those odds?

Naturally this has been distorted by inflation, which ignores the devaluation of the dollar over that period. 

Nonetheless, from Bessembinder’s data, 5% of all the wealth created on the U.S. stock market was created by one company: Apple AAPL. And 20% of all the wealth was created by 10 companies: Apple, Microsoft MSFT, Exxon Mobil XOM, Google parent Alphabet GOOG GOOGL, Amazon AMZN, Berkshire Hathaway BRK BRK, Johnson & Johnson JNJ, Walmart, WMT Chevron CVX and Procter & Gamble PG.  

It’s something to bear in mind — especially now that investors are getting thrilled about artificial intelligence and are trying to pick the likely winners from this next technological advance.

It reminds me of Warren Buffett’s comment that the only way for most investors to win from the invention of the automobile was to bet against the companies — like buggy-whip manufacturers — whose industries would be put out of business. Picking the winning car companies in advance was almost impossible: In the early days there were hundreds. Almost all of them went bust.

I remember a wise investor telling me something similar during the dot-com mania of 1999-2000. Even if the dot-com revolution really did end up transforming the world, he said, there was no way to know in advance who would be the big winners. And, he added, many of the likely winners probably weren’t even on the market.

How right he was. Of the top tech stocks back then, only Amazon and Microsoft have ended up big winners. In 1999 nobody was talking about Apple as the likely winner. Alphabet, né Google, wasn’t a public company and Meta, né Facebook, didn’t even exist.

Meanwhile, Bessembinder’s list of the companies that have destroyed the most stockholder value is littered with the big tech hopes of yesterday (or, actually, today). WorldCom is the all-time champ, alone leaving stockholders $100 billion poorer. Lucent, Palm and Sycamore Networks are also near the top of the list. 

So, too, are a lot of newer hot names, although it is surely far too early to draw firm conclusions about the ultimate fortunes of Uber UBER, DoorDash DASH and Airbnb ABNB, among others. (We should note that Bessembinder tracked the data through the end of last year, and many of these stocks have rallied in 2023.)

The latest research is yet another strong argument in favor of investing in broadly diversified, low-cost mutual funds. Actually, as we don’t know who will create the most wealth out of the stocks on the market today, it’s really a strong argument in favor of a fund that invests them equally, such as the iShares MSCI U.S.A. Equal Weighted ETF EUSA.

Meanwhile, if you are going to try to pick stocks, remember the odds are stacked against you. 

https://www.marketwatch.com/story/most-stocks-end-up-losing-you-money-whats-an-investor-to-do-996e8326?link=sfmw_fb

Industry outlook – Malaysian property sector

Industry outlook – Malaysian property sector

The property market recorded an increase in 2022 supported by a better performance in all sectors compared to the previous year. In 2022, total transactions volume and value increased by 29.5% and 23.6%, respectively to 389,107 transactions and RM179.07 billion (2021: 300,497 transactions and RM144.87 billion). Total transactions volume in 2022 is the highest volume recorded within the period of 10 years (2012: 427,520 transactions) whilst total transactions value is higher than the previous record high in 2014 (RM162.97 billion).

Of the total transactions recorded in the review year, 20.7% (80,373) and 76.5% (297,700) were transfers dated 2021 and 2022 respectively while the remaining percentage share was for prior years’ transfer. Primary market formed 13.8% (53,698 transactions) of the total transactions (purchase from developers) while secondary market took up the remaining 86.2% (335,409 transactions).

The property market continued to record growth in 2022, supported by the implementation of various government initiatives and assistance, improving labour market conditions and higher tourist arrivals. Several initiatives which outlined under Budget 2022 by the government to a certain extent helped improve property market activities. These are:

i. RM1.5 billion allocation for low-income groups housing projects i.e. rumah mesra rakyat and maintenance assistance programmes.

ii. Lifting the imposition of Real Property Gains Tax on the disposal of properties in the 6th year onwards by Malaysian citizens, permanent residents and other than companies.

iii. Guarantees of up to RM2 billion to banks via Skim Jaminan Kredit Perumahan in assisting gig works, small entrepreneurs and farmers in obtaining home financing.

The Overnight Policy Rate (OPR) has increased gradually from the lowest level of 1.75% since May 2022 by 25 basis points each in May, July, September and November 2022 to 2.75%. The Monetary Policy Committee decided to further adjust the degree of monetary accommodation amid positive growth prospects for the Malaysian economy and to reduce inflationary pressures due to strong demand conditions, tight labour markets, and the elevated commodity process, despite some improvements in global supply chain conditions.

On the demand side, loan applications and approvals for residential purchase increased by 28.7% and 48.7% respectively in 2022. Higher levels recorded in 2022 as the data updated in accordance with the latest data definition and requirement. The new application and approval data will be based on real-time application and approval during the month, irrespective of time lag or application withdrawal by customer in the same month.

Though higher growth recorded by the growth trends remain broadly similar. Similarly, loan applications and approval for non-residential purchase also increased at 33.8% and 92.8% respectively.

Volume of transactions across the sub-sectors showed upward movements. Residential, commercial and industrial, agriculture and development land sub-sectors recorded year-on-year growths of 22.3%, 46.3%, 44.5%, 44.6% and 35.7% respectively. Value of transactions moved in tandem with residential, commercial, industrial, agriculture and development land sub-sectors recorded an increase of 22.6%, 16.7%, 24.8%,50.5% and 16.6% respectively.

Residential property

There were 243,190 transactions worth RM94.28 billion recorded in 2022, increased by 22.3% in volume and 22.6% in value as compared with 2021. Secondary market formed about 80.0% (194,749 transactions) of the total transactions while primary market (purchase from developers) formed nearly 20.0% (48,441 transactions).

All states recorded higher market volume except for Labuan which recorded decline in market activity. The uptrend recorded in Pulau Pinang (31.1%), Johor (24.3%), Perak (18.9%), Kuala Lumpur (18.4%) and Selangor (15.9%) supported the overall increase in the sub-sector. Combined, these states formed about 60% of the total national residential volume. Selangor contributed the highest volume and value to the national market share, with 23.2% in volume (56,514 transactions) and 32.4% in value (RM30.58 billion). Kuala Lumpur recorded 13,182 transactions but ranked the second highest in value at RM11.79 billion, contributing 12.5% market share. Demand continued to focus on terraced houses, formed around 42.0% of the total residential transactions, followed by vacant plots (15.1%), high-rise units (15.0%) and low-cost houses/ flats (10.6%). By price category, RM300,000 and below accounted for 55.8% of the total, followed by RM300,001 to RM500,000 (24.2%) and more than RM500,000 (20.0%).

The primary market recorded more than 54,000 newly launched units in 2022. In spite of the increase in new launches, market remained cautious as the numbers were lower than those recorded in the pre-pandemic years.

Sales performance was moderate at 36.0%. Selangor (11,176 units), Kuala Lumpur (10,324 units) and Johor (7,718 units) were the three leading states with higher new launches. Both Kuala Lumpur and Johor recorded better sales performance at more than 40.0% as compared to Selangor, which recorded a lower rate of 26.9%.

Condominium/apartment units dominated the new launches, capturing 45.0% (24,366 units) of the total, followed by terraced houses with 42.2% share, comprised single storey (9,422 units) and two to three storey (13,403 units).

The residential overhang situation improved as the numbers reduced compare to previous year. A total of 27,746 overhang units worth RM18.41 billion recorded in 2022, reduced by 24.7% and 19.2% in volume and value respectively against 2021 (36,863 units worth RM22.79 billion). Johor retained the highest number and value of overhang in the country with 5,258 units worth RM4.33 billion, accounting to 19.0% and 23.5% respectively of the national total. Selangor (3,698 units), Pulau Pinang (3,593 units) and Kuala Lumpur (3,429 units) followed suit. In terms of value, the second highest was Selangor (RM3.36 billion), followed by Kuala Lumpur (RM3.15 billion) and Pulau Pinang (RM2.74 billion). Condominium/apartment formed 61.9% (17,162 units) of the national total overhang, followed by terraced houses (20.3%; 5,636 units). By price range, those priced at RM500,001 to RM1.0 million formed 33.6% (9,323 units) of the total, higher than 30.2% in 2021.

Price range between RM300,001 and RM500,000 came second, accounting for 29.3% (8,128 units).

Meanwhile, houses in the affordable price range of below RM300,000 formed another 23.5% (6,509 units) of the total and followed by more than RM1.0 million price range formed 13.6% (3,786 units). The unsold under  construction improved as the numbers dropped to 57,649 units (2021: 70,231 units), declined by 17.9% meanwhile unsold not constructed recorded sharply decrease by 49.7% in number with 11,053 units (2021: 21,960 units).

Commercial property

The sub-sector recorded a further increase in market activity in 2022. There were 32,809 transactions worth RM32.61 billion recorded in 2022, increased by 46.3% in volume and 16.7% in value as compared with 2021 (22,428 transactions worth RM27.94 billion). The increase in all states and major transactions involving shopping complex and purpose-built office recorded in the review period contributed to the overall improved market. Selangor contributed the highest volume and value to the national market share, with 26.4% in volume (8,654 transactions) and 31.7% in value (RM10.35 billion). Kuala Lumpur came second with 14.6% in volume (4,777 transactions) and 26.0% in value (RM8.49 billion) and Johor with 14.6% in volume (4,787 transactions) and 14.0 % in value (RM4.57 billion).

Shop segment recorded 16,862 transactions worth RM14.2 billion, dominating 51.4% of the commercial property transactions volume and 43.5% of the total value. Market activity recorded an increase of 45.7% in volume and 48.2% in value (2021: 11,574 transactions worth RM9.6 billion). Selangor contributed the highest volume and value to the market share, with 19.0% (3,207 transactions) and 29.9% of the total value (RM4.2 billion) followed by Johor with 17.1% (2,880 transactions) and 16.3% of the total value (RM2.3 billion). By type, two to two and a-half storey shops captured more than 53.0% (8,970 transactions) of the shops’ market share, followed by three to three and a-half storey shops, registering 27.4% share (4,628 transactions). Shop overhang segment increased to 6,720 units with a value of RM5.84 billion, up by 1.6% in volume and up 1.1% in value against 2021. The unsold under construction and not constructed saw the reverse, down by 28.8% (2,777 units) and 9.0% (365 units). Johor accounted for nearly 26.0% of shop overhang volume and 28.7% in value (1,731 units worth RM1.67 billion) and the unsold under construction with 36.2% share (1,005 units).

Industrial property

The industrial sub-sector recorded 8,082 transactions worth RM21.16 billion in 2022. Compared to 2021, the market activity increased by 44.5% in volume and 24.8% in value. Selangor continued to dominate the market, with 33.8% of the nation’s volume, followed by Johor and Perak, each with 14.0% and 8.1% market share.

The industrial overhang remained manageable. The overhang volume decreased to 880 units worth nearly RM1.15 billion, down by 22.1% volume and 27.6% in value against 2021. On similar note, the unsold under construction decreased to 450 units, down by 31.2%. The unsold not constructed recorded 51 units, more than 22 units recorded in 2021. Sarawak held most of the overhang, with 33.8% share, followed by Johor (23.3%) and Pulau Pinang (9.7%). By type, terraced and semi-detach units formed the bulk of the overhang, each with 59.2% and 29.8% share. Most of the overhang were above RM1 million, forming 45.2% of the national total.

The property market is expected to continue its momentum with various initiatives outlined by the government under the revised Budget 2023. Among others:

1. Full stamp duty exemption on instrument of transfer and loan agreement for the purchase of the first  residential home priced up to RM500,000 by Malaysia citizens remained until 31 December 2025.

2. Increase of stamp duty remission from 50% to 75% for the purchase of the first residential properties priced between RM500,000 to RM1 million by Malaysian citizens and applicable for sale and purchase agreements executed until 31 December 2023.

3. Full stamp duty exemption up to RM1 million and 50% stamp duty remission for the remaining balance on transfers of property by way of love and affection between family members (father to child and grandfather to grandson).

4. Allocation of RM460.2 million for the building of new homes and home renovations in rural areas.

5. Allocation of RM389.5 million will be channeled to the People’s Housing Programme.

6. Allocation of RM358 million for the construction of affordable homes under Rumah Mesra Rakyat programme by Syarikat Perumahan Negara Berhad.

7. Allocation of RM462 million for the construction of 23,000 houses under Projek Perumahan Awam Malaysia.

8. Increase the guarantees of up to RM5 billion via Syarikat Jaminan Kredit Perumahan in assisting gig workers such as e-hailing workers in obtaining home financing up to RM500,000.

As the country’s GDP growth is projected to be moderately lower than the previous year and in line with other countries in the region, the property market performance is expected to be cautiously optimistic given the unpredictable external environment. The accommodative policies, continuous government support, well execution of measures outlined in the revised Budget 2023 and the proper implementation of strategies and initiatives under RMK-12 are expected to remain supportive of the property sector.

(Source: Property Market Report 2022, Valuation & Property Services Department Malaysia, Ministry of Finance.)