OCTOBER 2008

Asia ex Japan equity markets capitulated in October, as global equity markets were hit by a tsunami of selling pressure triggered by the US financial market crisis. The Hang Seng China–Affiliated Corporations Index (Red Chip) was the best performer, despite plunging 27.0% in US$ terms. The Jakarta Composite Index was the worst performer during the month, losing 41.0% in US$ terms. The South Korean won and Indian rupee continued their losing streak against the US dollar, losing 6.5% and 5.1% respectively, while the Indonesian rupiah depreciated 14.0%. The Japanese yen gained 7.8% in October, prompting Bank of Japan actions to ease pressure on exporters.

The Dow Jones Industrial Index lost 24.7% at one point, but recovered somewhat to close 14.1% lower in October. The mantra during the month was to prevent credit activities from coming to a complete standstill in the global economy and allow de–leveraging in a less panicky fashion. The U.S Senate approved an improved version of the US$ 700 bn financial rescue package on 1st October. Leaders in Europe also introduced stimulus and pledge packages worth more than a trillion euros. Equity markets around the world banned or imposed stricter restrictions on short–selling as prices plunged. There were also coordinated interest rate cuts and money market operations by central banks around the world for the first time in history as the confidence crisis deepened. Bank deposits were subject to a run as Iceland and Argentina had difficulty meeting obligations. This prompted further government actions to guarantee or lift the limit of guarantee on deposits, around the world. The US Fed opened swaps facility of US$ 30 bn each with South Korea, Brazil, Mexico and Singapore on 30th October. Prices of commodities also crashed on exit of financial investors from the commodities sector, and anticipation of demand destruction. Crude oil price fell to US$ 64 per barrel at the end of October from nearly US$ 98 per barrel at the end of September.

Global equity markets found some stability in the last few days of the month. The report of US economy shrinking 0.3% yoy shrinkage in third quarter GDP strengthened hopes that the US Fed would reduce rates further. The US Fed eventually reduced its rates to 1% on 30th October.

There are signs of credit market pricing in lower risk aversion towards the end of the month as the Ted Spread and Libor declined significantly from intra–month high. However, confidence remains fragile even though investors look to bargain hunt. The measures taken by governments around the globe would restore confidence gradually.

With global economic slowdown, the threat of inflation seems to have abated, relaxing government’s policy limitations compared to earlier in the year. However, given that central banks around the world had pumped in massive liquidity, it is still necessary to be vigilant about the inflation rearing its head.

Further out in the horizon, the global economic slowdown will take centre stage. Sentiment in Asia ex Japan equity markets is likely to remain uncertain for the rest of the year on macroeconomic concerns. However, with the substantial falls in equity prices over the last two months, we think value for longer term investment may have emerged. Our strategy would be to accumulate stocks which have become increasingly attractive based on our tightened investment criteria, when the equity market stabilizes, and switch out of stocks which would remain derated. We look to increase overall portfolio exposure only to companies with clear earnings growth visibility.

On the bond market, the MGS yield curve flattened in October as the prospects of a domestic rate cut improved. As the global financial market turmoil worsened in October, demand for Malaysian government debt gathered momentum. Despite the sharp rally in the government bond market, investors in the corporate bond market remained mostly sidelined due to a lack of new primary bond issuances to guide pricing levels. Even when there was buying, interests were limited to the high grade papers.

Along the AAA segment, there was a new issuance of a longer dated tranche of the Rantau Abang bonds. Rantau 15 emerged at 5.00% but post issuance, it was seen grinding down to 4.83% towards the end of the month. Meanwhile, we also noted the debut of some new Cagamas MTN and iMTNs. Cagamas issued RM1.82 billion of conventional MTNs and RM215 million of iMTNs. To date, the total amount of Cagamas debt securities outstanding stands at RM22.695 billion. Down the credit curve, interest was seen mostly on short and medium dated papers. There was some demand for power asset, YTL Power MTN Sep’11 (AA1). Bond yields were seen falling down to 4.79% from 4.85% a month earlier. Up the term structure, YTL Power Sep’13 traded at a refreshed 5.06% compared to 5.23% a month earlier.