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Impact of the US Financial Crisis to Malaysia's Economy September 29, 2008
There is a saying that when the US sneezes, Asia along with the rest of the world will catch a cold. What impact does recent bank bankruptcies and bailouts in the US mean to local investors and the Malaysia’s economy? To find out fund managers have to say, the iFAST editorial team talked to Nik Azhar Abdullah, ceo of Alliance Investment Management Bhd and Andrew Wong, equity, chief investment officer for AmInvestment Services Bhd.
Author : iFAST Editorial Team

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Impact of the US Financial Crisis to Malaysia's Economy

The ongoing financial turmoil fuelled by bankruptcies and bailouts seems to be just another piece of the jigsaw puzzle that marks the unravelling of US’ credit crisis.   Bad news flooded headlines as one of the world’s largest banks –Lehman Brothers filed for bankruptcy and Merrill Lynch & Co was acquired by the Bank of America for US$50 billion. Shortly after, the US Federal Reserve had to rescue American International Group, the biggest insurer in America, which was also on the brink of collapsing.

A ripple effect of panic and worry spread across around the world and investors here are at a lost with their next course of action.  To find out fund managers have to say during these times, the iFAST editorial team talked to Nik Azhar Abdullah, ceo of Alliance Investment Management Bhd and Andrew Wong, equity, chief investment officer for AmInvestment Services Bhd.

As the US financial industry struggles, it is very easy to take a bearish stand as bets are placed on whom would be the next to fall. Nik Azhar says that the leap in the cost of Morgan Stanley credit default swaps (a form of insurance against default) recently; suggest that Morgan Stanley may be the next financial giant to fall.  “As a result, a series of large hedge funds switched money out of Morgan Stanley's prime brokerage. The share price of Morgan Stanley has fallen from US$51.70 in Jan 08 to US$27.20. To a lesser extent, Goldman Sachs is in the same position. However with rescue funds available, the danger of collapse has decreased considerably,” he views.

Alliance Investment Management does not anticipate a deep recession in the US but there will be continued market volatility. . “Our initial thoughts was that the financial sector failures would continue with more household names but the authorities have instituted measures such as limiting short selling on financial counters and proposing to make available funds to buy the ‘toxic’ assets,” says Nik Azhar.

The measures include US$ 700 billion financial rescue plan suggested by US treasury secretary Henry Paulson. These funds will be utilised buy bad mortgage debt in an effort to unfreeze the credit squeeze in markets. Nik Azhar says that with these measures in place, the worst as far as the stock market is concerned may have already emerged, but the US economy is still a long way from a full recovery.

Other Parts of the World

Meanwhile, AmInvestment Services’ Wong believes that the further collapse of financial institutions would likely happen in the Europe, rather than the US.  “Once the dust settles, we will have to face the reality that global growth may slow down to 1% next year. It is not that simple to state an immediate outlook as there are many intermingled and moving parts of the economy to consider. The only certainty is that this is the worst crisis of our generation,” says Wong.

Wong also foresees that US, UK and Australia might undergo what Japan went through in the 1990s.  However, the key difference, according to him is that the authorities acted swiftly with the knowledge of what happened to Japan historically. “A global slowdown is inevitable but the scale of the combined proactive global response will provide sufficient liquidity to generate some growth,” he adds.

Property prices have tanked in the US and are falling in the Europe, especially within the UK. Consumer spending is also weak in these countries and the tough economic conditions have resulted in lower demand for loans for business expansion. 

The Impact Here

Nik Azhar says that the Malaysian economy is still on a growth path as interest rates remain low.  “Asset prices are not deflating. Credit for consumers in selected sectors such as mortgage and auto is still somewhat easily available and loans to corporations may have been tightened due to the economic slowdown. The risk premium attached to the country is expected to stay high until we see clearer picture with regard to our politics and we do not expect a sustained recovery in the market in the near horizon until we have political stability,” he offers.

Nik Azhar advises investors should be patient and to look into opportunity to buy good value stocks or funds on weakness. The current weak market offers great opportunity to accumulate good fundamental stocks at attractive levels. As for Alliance Investment Management’s portfolio, Nik Azhar shares that the fund house has a neutral asset allocation for equities in the short term, but are looking to bottom fish during significant market corrections. “Our banks do not have any significant exposure to sub-prime issues or to the global financial institutions that are at risk,” he adds.

Wong comments that Malaysia is blessed by natural resources such as palm oil, oil and gas. This natural reserves gives room for ‘manoeuvrability’ and the country will not be as severely affected as others. AmInvestment Services has opted for a defensive stand with a high cash weighting. Taking into consideration the global economic slowdown and inflationary woes, both fund houses have dropped their growth forecasts for the Malaysian economy. Alliance Investment Management’s reviewed its growth forecast from 5.7% to 5.2%, while AmInvestment Services expects a 5% growth for Malaysia’s economy next year.

iFAST Editorial Team is part of iFAST Capital Sdn Bhd.

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