Different phases of business cycle will determine how one would strategise his or her portfolio management / investing style.

Recap – Background of Business Cycles

business-cycle-graph.jpeg

Source: http://financeandcareer.com/what-is-the-business-cycle-and-how-does-it-work/

Breakdown of Phase.png

Source: https://www.thestreet.com/story/13841210/1/is-it-time-for-real-estate-investors-to-hit-the-panic-button-that-s-what-they-want-you-to-think.html

Which phase is Malaysia in now?

It is important to note that there is NO one-fit-for-all 100% accurate categorisation of economic phase for a particular country at any point in time. Some elements may overlap between different economic phases.

Is inflation increasing above expectations?

Malaysia’s inflation rate has been on an increasing trend as shown below:

Inflation_MY_Jan 18.png

Consumer prices in Malaysia went up 3.5 percent from a year earlier in December of 2017, following a 3.4 percent rise in the prior month and matching market consensus. Cost of food & non-alcoholic beverages and transport rose faster while inflation was steady for housing & utilities. Annual core inflation rose 2.2 percent, the same pace as in November. It remained the lowest figure since December 2016. On a monthly basis, consumer prices edged up 0.1 percent, after a 0.7 percent rise in a month earlier. Inflation Rate in Malaysia averaged 3.64 percent from 1973 until 2017, reaching an all time high of 23.90 percent in March of 1974 and a record low of -2.40 percent in July of 2009.

Key question to ponder – is inflation peaking in Malaysia? If yes, are we looking at possible stage of early recession?

Is monetary policy getting more restrictive?

To some extent, yes. Recent rate hike by BNM: At the Monetary Policy Committee (MPC) meeting, Bank Negara Malaysia decided to increase the Overnight Policy Rate (OPR) by 25 basis points to 3.25 percent. The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 3.00 percent and 3.50 percent respectively.

OPR_MY_Jan 18.png

Are businesses begin contracting?

Inventory level is reflecting cautious stance of businesses, as current replenishment level is relatively lower than 2010-2014. Further, if compared to 2010 – 2014, the following chart highlights that the current inventory turnover cycle is relatively longer.

Inventories_MY_Jan 18.png

Business confidence has been on a declining trend since 2010 until recent one-off spike (?) nearing end 2017. Question to ponder – will we see a more sustainable higher business confidence throughout 2018?

Business Confidence_MY_Jan 18.png

From the graph below, it appears that industrial production is on a positive uptrend. Nevertheless, the current industrial production level is relatively lower than 2013-2015. Question remains on the sustainability of this trend for 2018.

IP_Malaysia_Jan 18.png

The Nikkei Manufacturing PMI in Malaysia fell to 49.9 in December of 2017 from an over three-and-a-half year high of 52.0 in November. New orders declined again and buying activity dropped the most since September. At the same time,outstanding business decreased for a seventh successive month, providing evidence of ongoing spare capacity in the sector. Meanwhile, output growth slowed while new export orders grew for the second straight month. On the price front, input cost inflation remained sharp and continued to place pressure on firms’ margins. Manufacturing Pmi in Malaysia averaged 47.98 from 2015 until 2017, reaching an all time high of 50.4 in August of 2017 and a record low of 47 in November of 2015.

PMI_MY_Jan18.png

A declining cement production level shows potential issues with the real estate, property and construction industries.

Cement Production.png

So, are businesses in Malaysia begin contracting? From the above economic stats, it appears mixed. From my personal perspective, businesses are adopting a cautious stance at this juncture, resulting in mild contraction in their business activities. May be partly attributable to the upcoming general election (GE14)?

Consumer confidence declining?

Probably, yes. Current level of consumer confidence in Malaysia remains subdued.

malaysia-consumer-confidence.png

Further, Malaysia’s household debt remains high:

MY Household Debt.png

Are interest rates beginning to peak?

For overnight policy rate (OPR), this may be for 2018. Bond yield is definitely on an increasing trend, with 10Y nearing 4.0%. Back in 2016/2017, the 10Y yield shot up to above 4.4% (due to increased risk premium).

10Y.png

Real estate prices peaking or declining?

Real estate prices have declined from the peak in 2012-2013. At this juncture, there is no clear path of recovery in real estate prices primarily due to oversupply issues.

malaysia-housing-index.png

News Update: Malaysia’s property market is expected to remain sluggish in the first six months of the year, leading property consultant Knight Frank Malaysia said. The firm also said while the recent property freeze may provide a breather to the oversupplied markets, it is not expected to correct the oversupply situation in the short to medium term. “The property market will continue to self-correct as it looks to find its equilibrium, Knight Frank Malaysia managing director Sarkunan Subramaniam said in its latest research report “Real Estate Highlights for 2nd Half of 2017” released today. The report looks into the market performance across the various property mix namely residential, office and retail, and highlights the trends and outlook in key markets of Malaysia namely Kuala Lumpur, Klang Valley, Penang, Johor Bahru and Kota Kinabalu. The firm said the market continued to be weak in the second half of last year with oversupplied position in the main sub-sectors such as high-end residential, office and retail. Amid flagging demand ahead of the upcoming general election, overall market performance is expected to remain lacklustre going into the first half of 2018,” Subramaniam said.

How we do we possibly plan our investment strategy?

In a nutshell, based on the above simple desktop analysis, can we possibly conclude that Malaysia is currently in Peak / Early Recession stage?

If that is the case, shall we consider investing in Consumer Staples, Healthcare, Telecom and Utilities? 

sector_investing_BCU_Oct31_chart7.jpg

Source: https://www.fidelity.com/viewpoints/investing-ideas/sector-investing-business-cycle

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