After registering a loss of 14.1% in 3Q2008, the Kuala Lumpur Composite Index (KLCI) declined by a further 13.9% to close at 876.75 points in 4Q2008. Commencing the quarter at 1,018.68 points, the KLCI fell to a 4-year intraday low of 801.27 points in late October in tandem with regional markets on concerns over a steep global economic slowdown following the global credit crisis. The KLCI subsequently rebounded to above the 900 points level in early November before succumbing to selling pressures in line with declines in foreign equity markets. The KLCI retreated further to a low of 835.17 points in early December before rebounding on gains in selected plantation and index stocks to close at 876.75 points for a loss of 13.9% for the quarter.
Regional markets continued to retreat in 4Q2008 on concerns that a slowdown in major developed economies will dampen the region’s export performance. In North Asia, the South Korean and Japanese market fell by 22.3% and 21.3% respectively in 4Q2008. In South East Asia, the Philippines and Indonesia markets fell by 27.1% and 26% respectively in 4Q2008.
On Wall Street, the Dow fell to a 5-year low of 7,882.5 points on 10th October 2008 despite a coordinated effort by the U.S. Federal Reserve and five other major central banks to reduce interest rates on 8th October 2008. The Dow retreated further to a 5½-year low of 7,449.4 points in late November on concerns over the future of the U.S. auto industry. The Dow subsequently rebounded to touch a 4-week high of 9,026.4 points on 8th December 2008 on expectations of a possible US$14 billion bailout package for the U.S. automotive sector. However, the U.S. Senate’s initial rejection of the bailout plan and weak housing market data caused the Dow to retreat towards the end of the quarter. The Dow closed the quarter at 8,776 points to register a loss of 19.1% while the Nasdaq fell by 24.6% to close at 1,577 points over the same period.
Economic Review
Malaysia’s GDP growth moderated to 4.7% in 3Q2008 from 6.7% in 2Q2008 due to a sharp contraction in net exports of 14.8% compared to an increase of 20% in the previous quarter. However, consumer spending growth remained resilient at 8.1% in 3Q2008 compared to 9% in 2Q2008.
On the supply side, growth of the services sector eased to 7.1% in 3Q2008 compared to 8.2% in 2Q2008 while the manufacturing sector’s growth slowed to 1.8% from 5.6% over the same period due mainly to weaker exports. The agriculture sector’s growth slowed to 3% in 3Q2008 from 6% in 2Q2006 following lower palm oil output. The mining sector declined by 0.3% in 3Q2008 after contracting by 0.5% in 2Q2008 amidst lower natural gas output while the construction sector’s growth slowed to 1.2% from 3.9% over the same period, amidst higher costs of building materials.
Malaysia’s exports contracted by 2.6% in October compared to a growth of 15% in September due to lower electrical & electronic products and commodity exports. Meanwhile, imports declined by 5.3% following an increase of 11.4% over the same period. As export growth outpaced import growth, the cumulative trade surplus for the first ten months of 2008 rose by 47.6% to RM118.8bil compared to the same period last year.
The inflation rate eased to a 6-month low of 5.7% in November from 7.6% in October due to lower transportation and food costs. In line with the policy to adjust domestic fuel prices according to prevailing global oil prices, the Malaysian government lowered petrol and diesel prices by 5% and 6% to RM1.80 per litre and RM1.70 per litre respectively effective from 16th December 2008. Following the retracement in global oil prices since July 2008, domestic petrol and diesel prices have now fallen to levels prior to the price increase in June 2008.
On the international front, U.S. GDP contracted by 0.5% in 3Q2008 following 2.8% growth in 2Q2008 due to a contraction in consumer spending and weaker exports. For the first nine months of 2008, GDP growth eased to 1.8% from 2% registered for the whole of 2007 on slower consumer and investment spending.
The U.S. Federal Reserve reduced the Federal funds rate by a total of 175 basis points in 4Q2008 to 0.25% to mitigate the economic impact of the weaker house prices and tight credit conditions. The government’s rescue plan under the US$700 billion Troubled Asset Relief Program (TARP) was originally intended to buy troubled mortgage-backed assets but was subsequently revised to recapitalise banks and other financial institutions.
On 25 November 2008, the Federal Reserve took further steps to stabilize the financial system with its plan to purchase up to US$600 billion in mortgage-backed assets from mortgage institutions, Fannie Mae and Freddie Mac, to lower long-term interest rates and increase credit availability for home purchases. These two mortgage institutions guarantee more than half of all mortgages in the U.S. In addition, the Federal Reserve and the U.S. Treasury Department will jointly provide a new US$200 billion credit facility for financial institutions to provide commercial lending on securitized loans such as auto loans, credit card loans, student loans and small business loans.
The number of U.S. non-farm job losses increased to a 35-year high of 533,000 jobs lost in November from 320,000 jobs lost in October due to higher unemployment in the services and construction sectors. The unemployment rate rose to a 15-year high of 6.7% in November from 6.5% in October.
Crude oil prices from US$100.64/brl at the beginning of the 4Q2008 to a 5-year low of US$31.41/brl on 22nd December 2008 on expectations that slower global economic growth will reduce fuel demand. Oil prices subsequently rebounded due to renewed political tension in the Middle East to close at US$44.6/brl to register a decline of 55.7% for the quarter.
Stockmarket Outlook
In 4Q2008, the KLCI fell by 13.9% and has outperformed most regional markets over the same period. For the full year’s performance in 2008, the KLCI registered a loss of 39.3% and has broadly outperformed regional markets, which sustained losses of more than 40% over the same period.
The U.S. Federal Reserve is ready to take fresh measures to ease credit markets and lower interest rates on agency and mortgage-backed securities by buying these securities from financial institutions. However, investors remain concerned over the impact of declining inflation rates on global financial assets as economic activities continue to decelerate in 4Q2008 and into 1H2009.
Nonetheless, the medium-term prospects for regional markets are supported by below trend valuations, high level of domestic savings, easing inflationary pressures as well as expansionary monetary and fiscal policies. If investors’ risk appetite normalises with the U.S. dollar resuming its secular weakness against regional currencies, demand for selected emerging market assets may strengthen, leading to a more stable trading environment for regional markets over the medium-to-long term.
On the local front, the declining trend in inflationary pressures will allow the central bank greater flexibility in reducing the overnight policy rate further in early 2009. Coupled with the roll-out of infrastructure spending under the RM7bil stimulus package, these counter cyclical policies are expected to support domestic consumer spending and investment in the year ahead.
On the domestic front, Malaysia’s equity market is currently trading at a Price/Earnings (P/E) ratio of 12.4x for 2009 earnings, which is a discount of 26.6% to the 8-year average P/E ratio of 16.9x. The local market is also supported by a gross dividend yield of 6.2%, which exceeds the previous historical high of 6% registered in August 1998 following the Asian financial crisis.
Bond Market Review & Outlook
For the quarter ended 31st December 2008, the U.S. Treasury market strengthened amidst ongoing risk aversion and a series of reductions in the Federal funds rate by a total of 175 basis points to 0.25% in 4Q2008. The 3, 5 and 10-year U.S. Treasury bond yields fell by between 79 basis points (bps) and 161 bps to 0.97%, 1.55% and 2.21% respectively over the quarter.
Sentiment on the U.S. Treasury bond market is expected to be supported by easing inflationary pressures in 1H2009 and sustained demand for safe haven assets amidst the ongoing slowdown in U.S. economic activities.
Malaysian Government Securities (MGS) strengthened in 4Q2008 following Bank Negara’s decision to reduce the overnight policy rate by 25 bps to 3.25% on 24th November. Sentiment in the local bond market was also supported expectations of further reductions in the overnight policy rate in 1Q2009 amidst easing inflationary pressures. The 3, 5 and 10-year MGS yields fell by between 98 bps and 140 bps to 2.89%, 2.96% and 3.17% respectively.
The local corporate bond market remained stable amidst thin trading activities. The 3-year AAA corporate bond yield rose by 6 bps respectively over the quarter. However, yields on the 5 and 10-year AAA corporate bonds remained unchanged at 4.57% and 5.95% respectively over 4Q2008.
In the money market, the spread of the 3-month KLIBOR over the 3-month U.S. Treasury bill rate widened to 330 bps over the quarter from 279 bps at the end of September 2008. The yield on the 3-month U.S. Treasury bill fell by 83 bps to 0.07% over the quarter due to safe haven buying amidst uncertainties in global financial markets.
On the domestic front, the MGS market is expected to be supported by demand for safer fixed income securities. In addition, the central bank may lower interest rates further in early 2009 given the continued easing trend in the domestic inflation rate.
Over the long term, the local bond market is projected to be underpinned by resilient demand for quality corporate bonds and sustained liquidity in the domestic economy.
Posted by raziunittrust09 
