Saturday, 20 December 2014

Brief Notes On Current Economy Situation

Investors are told by experts to read more investment books and financial news in newspaper.

Do I read a lot? Actually not.

I only read a few books on investment for the past 3-4 years, which includes the 2 books by "Cold Eye", one on basic accounting and another 2 books on stock market investment.

I never read a single book about Warren Buffet and other famous investors, or other famous investment books such as Millionaire Next Door etc.

I do read one book from the Rich Dad's series though. That was long time ago.

I read newspapers almost everyday, but ONLY the Sports column. I find that I'm actually not too interested to read financial news. This is bad, I know.

I may flip through financial news on newspapers a few times a week, but I mainly read local financial news only.

I am still new to those financial jargon & the law of economy. You don't expect me to read something that I don't understand, right?

I get the financial & business news mainly online from i3investor and The Edge, but I only choose a few to read, as I'm not able to get online frequently now.

To force myself to read more, I started to subscribe to Busy Weekly in Nov14 when they were doing the offer. Til now there are a few editions that I didn't even read a single page.

So do not always agree with me. I still have many things to learn.

In order to become a better investor, I know that I need to force myself to swallow more world financial & economy news. It's not easy frankly.

I will write down my own view on current world economy in this blog so that it can serve as reference in the future.

Before Oct 2014, I thought that there was no reason for a bear market in 2015. The impression I get from financial news was that US & Europe were in the process of recovery.

The only concern might be China, who may face a slow down in growth.

Now with the unexpected drastic drop in crude oil price, the whole picture seems to change.

In order to eliminate competition from high-cost shale oil producers in North America, OPEC decided not to reduce their oil production.

As a result, crude oil price continue to drop.

Those net crude oil exporting countries are feeling the heat, including OPEC members.

Russia's situation is scary, with a double blow from the drop of crude oil price plus the effect of economy sanction by the West.

Its currency Ruble has crashed from 1 USD:35 RUB to over 70+RUB at one point in just a few months time.

It is a 100% drop. Just imagine if USD/MYR suddenly depreciates from RM3.20 to RM6.00...

To check the continuous depreciation of Ruble against USD, Russia central bank recently raised its interest rate from 10.5% to 17.0% overnight!

If this happens in Malaysia, I think many Malaysian with high debts including me will "mampus".

If Russia goes bankrupt, will it drag the whole world into recession? 

I remember few years back when a few small countries in Europe faced the similar threat, it seems like everyone is panic and the whole world will be seriously affected.

However, I read some reports saying that Russia's collapse will not affect the world much as it mainly exports energy which can be substituted by other countries.

So is Greece more important than Russia? I don't know.

One local economy & financial expert with PhD title writes a series of articles regarding current & future economy outlook. He predicts that the next 2 years will be really really bad for Malaysia. 

After reading those articles which seem to make sense, I feel like I should dump all my shares and hold cash for the next 1-2 years.

Anyway, no one can predict the market accurately, and sometimes theory is just a theory.

Ringgit has depreciated almost 10% in 3 months time to RM3.50. It will benefit USD-based exporters and burden the importers and those companies with debts denominated in USD.

How will it affect the whole country in general?

With the fall in crude oil price, Malaysia as a net exporter is expected to suffer due to its "not-so-healthy" financial situation. 

Petronas will cut its capex by 15-20% next year and hence government income from Petronas will also go down. 

Its CEO told reporters in the end of Nov14 that payment to government could be 37% lower if oil stays around USD75 per barrel.

Petronas contributes about half of Malaysia government's revenue, and now the oil price is even lower at around USD60. It may still go lower.

However, the fuel subsidy has been abolished since Dec14 and GST will kick in from Apr15. No one can be sure whether the government can sail through the low crude oil price environment peacefully.

If the government has difficulty to cope, then a lot of major projects have to be put on hold I guess. It will affect a lot of sectors.

Thus, foreign investors started to flee Malaysia. KLCI slumped and Malaysia Ringgit depreciated, while most other regional stock markets gain.

US and Euro markets are busy breaking new highs. Why KLCI does not follow US anymore? When US economy is good, other countries' economy can be bad?

Actually US did not suffer much during Asian Financial Crisis in 1997-98. 

       Dow Jones Index since 1985

In the end of Oct14, US just ended its 5-year quantitative easing programme (QE) as its economy has improved.

At the same time, Japan announced that it will further expand its own QE in response to an ailing economy. This makes many people planning a Japan holiday trip next year as Yen has depreciated quite a lot against MYR now.

China surprised everyone by cutting its lending interest rate for the first time in 2 years to 5.6% in order to tackle sluggish growth.

Eurozone is also hinting to implement a large scale QE to give a push to its slow recovery.

Because of the reasons above, aided by low crude oil price, stock markets of those economy powerhouse such as US, Euro, China & Japan are expected to advance next year!

Besides, US Fed is also highly anticipated to raise the country's interest rate in 2015 for the first time since 2006. Its current rate is only at 0.25% for quite a number of years already.

       US Historical Interest Rate

Raised interest rate in US is said to further strengthen USD, and may give further pressure to other countries' currencies.

Low interest rate environment means lower cost of living. People can buy houses, cars etc more easily with low borrowing cost.

Sooner or later this will lead to inflation when demand is more than supply. This is when interest rate hike comes in.

I get an impression from certain articles that US rate hike will have negative impact to Malaysia & KLCI. Will it happen suddenly in 2015, or gradually over many years? 

It is just a start of interest hike, should we need to worry now?

As Ringgit is cheap now, isn't it attractive for foreign investors to invest in Malaysia? Of course Malaysia need to be in a good shape to attract foreign investment.

For the past one year, it is obvious that crude oil, crude palm oil & KLCI all retreats from its recent peak in mid-2014.

Brent crude oil price started to drop from its peak in July14, which coincided with KLCI. However, CPO price started to trend downward earlier since Mac14.

For the past 10 years, during the bear market in 2008, all three reached their peaks in early 2008 before the massive slump which found their bottom at the turn of year 2009.

After that, both CO & CPO rebounded and reached their peaks in early 2011.

From there, crude oil fluctuated around USD110 for 3 years+ until the sudden fall recently, whereas CPO price was in a gradual downtrend.

Nevertheless, KLCI did not follow this time. It only experienced a major correction in 2011 but kept on breaking new high after this.

I think it is the same for almost all major stock markets around the world.

So now, crude oil at USD60 is very close to its lowest level during 2008 crisis at around USD50. CPO at RM2100 now from its peak of RM3800 is also quite close to RM1600 in 2008.

Despite a drop of 10% from its peak in July14, KLCI at 1700 now is still far away from lowest point of 800+ in year 2008.

As economy has largely improved, I think it is unlikely to touch that level again in the next bear market.

Anyway, during the period of 1997-2000, KLCI and CPO price actually moved in different direction.

It seems like rosy outlook suddenly turns sour towards the end of 2014. This is how fast things (or emotion?) can change.

As an investor, I think it is important to learn from experience and do not forget our initial investment strategy.

If you have got a few sleepless nights or near heart attacks for the past few days, then you might need to review and change your strategy to one that suits you better.

When we step into the year of 2015, will things turn better or worse?

If it becomes better, then it's nice.

If it becomes worse, then it's opportunity.

But you need to have enough CASH of course.


  1. BursaDummy: Very great writing and you must have taken few hours to get the raw data for the writing. Salute you. Thank you very much for your contribution.

    I like the last 3 lines the most:

    "If it becomes better, then it's nice.

    If it becomes worse, then it's opportunity.

    But you need to have enough CASH."

    1. Thanks bsngpg, or Ng from Penang? :)

      It's not that difficult with the help of google.

  2. Crude stocks rose by 5.4mbls last week, while gasoline inventories climbed by 5.5mbls, according to API on Tuesday as regards Epic research.

  3. Like my idol Walter Schloss said: "Macro always worry people."

    Last time oil price hike, ppl say no good coz inflation, now oil price slump, ppl also say no good, coz deflation.

    Last time ppl say QE stop will be disaster, now QE stopped nothing happen.

    1. It seems like everything has a good and bad side of it :)

  4. <there is nothing about Bursa