Economics & Strategy

A cautious trading market in view of social problems and a slew of poor corporate results

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(for the week of 30 March-3 April 1998)

A cautious trading market in view of social problems and poor corporate earnings

A hectic week passed with the release of Bank Negara 1997 annual report and the mention in Parliament of new measures to boost economic recovery. Both events can be viewed as a positive development, though void of significant market-moving announcements. It was a week when the market took kindly to the absence of negative news, rather than to the dearth of positive.

Political unity on show: Most incumbents in 165 Umno division electionswere retained or returned unopposed, marking a successful conclusion to the annual contests. No major casualties are reported, although a handful were challenged and defeated. In the east coasts state of Pahang (11 divisions), Kelantan (14) and Terengganu (11) - the traditional Opposition's stronghold or battleground - unity was the order of the day as the status quo was maintained. Contrary to wide belief, the trial of economic slowdown has been a unit-ing, rather than divisive, factor on the political front so far.

Interest and exchange rates dilemma: Malaysia, according to the central bank, is committed to a tight monetary policy this year. That means maintaining a positive real interest rate of 3-4%, given that inflation is projected to escalate to 7-8% for 1998. Interest rates will likely remain at least as high as 11%. The central bank's policy appears to be on collision course with what was said in Parliament - the NEAC wants the government to consider reducing the statutory reserve requirement by 1-2% point from current 10% and lower interest rates to resuscitate viable local businesses affected by high interest servicing. Acceding to the NEAC's pro-liquidity suggestions could mean sacrificing the ringgit's strength, which has recovered some lost ground from the RM3.80 to the RM3.57 levels - one of the major factors to the KLSEÕs resilience in recent weeks.

New deal between IMF and Indonesia? Sentiment towards the Asian region is expected to improve given prospects of a new and wide ranging agreement between the International Monetary Fund and Indonesia. According to the Asian Wall Street Journal, talks on four of five areas are nearly completed: structural economic reforms, monetary policy, efforts to strengthen the banking sector and review of the nation's budget. However, the other key question of how to restructure Indonesia's US$68b private foreign debt has yet to be resolved.

Market outlook: We expect trading to be cautious this week as investors digest last week's ethnic troubles and the slew of corporate results. In general, results for the half year or full-year ending Dec 31, 1997 have been disappointing with many affected by the currency turmoil and economic slowdown in the later part of the year. As widely expected, good results were reported by the food and beverage companies and plantation concerns. We would caution investors against chasing these 'defensive' stocks which have significantly outperformed the market in the last 12-months and trade at rich PE multiples.

The only big group which has yet to release its interims is the Lion group of companies comprising Amsteel, Lion Corp, Lion Land, Posim, Angkasa Marketing, Chocolate Products and Malaysian British Assurance. Poor results are expected due to (1) higher raw material costs for the steel operations due to ringgit depreciation; (2) lower demand for steel; (3) provisions for unhedged US-dollar denominated borrowings and (4) heavier interest costs due to higher interest rates.

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