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GOLDILOCKS ECONOMY
By Pauline Yong
13-3-2007
China’s People Daily Online reports: “If the Chinese markets catch a cold,
the major markets around the world will sneeze.” Yes, for the first time,
the Chinese stock market has affected global markets, and it won’t be the
last. On February 26, Shanghai stocks shed nearly 9%, the highest daily
slump for the Chinese stocks in ten years. The Dow Jones Index fell more
than 500 points at one time during the day, and our KLCI shed more than
13% (or 162 points) in 5 trading days. Will our Bursa Malaysia sustain the
blow?
Firstly, let’s compare our current KLCI’s PE (price earning ratio) of 17 with
Shanghai Composite Index’s PE of close to 40, who has the possibility of a
greater fall? Hence, the clash of Shanghai stocks appeared as unsurprising
for many analysts.
Next, by browsing through our key economic indicators, it seems that our
economy is experiencing a phenomenon known as “Goldilocks Economy”.
This is a term used to describe an economy as “not too hot, not too cold,
but just right.” Our CPI has softened down to 3.7 in October 2006, inter-
bank overnight interest rate maintained at 3.5%, our GDP has a healthy
moderate growth of an average of 5.7% in 2006. Our economy is mostly
driven by strong domestic consumption and private investment. We have
a very high savings rate of close to 40% of GNP, one of the highest in the
world. (US’s savings rate is less than 1%). Our banking system is sound
with 5% to 7% of NPL (Non performing loan) to total loans as compared
with more than 12% in 1998.
Moreover, as unit trusts are gaining popularity among the citizens, more
savings will be invested into our local stock market. This scenario is
similar to what happened in the US and Canada during the mid 1990’s,
where they were investing in a wide variety of mutual funds, ranging
from local US Funds, Emerging Markets Funds, European Funds, Bond
Funds and so on. Interestingly, the term ‘goldilocks economy’ was
originated in the US during that time.
However, as Malaysia is an open economy, we face threats from around
the world - the possible financial turmoil in the U.S., the rising crude oil
prices that lead to inflation which will in turn raise our interest rate,
terrorist activities, and of course the Chinese stock market bubble.
All in all, I still maintain an upward trend view for our KLCI, and I believe
it has a very strong support level at around 900 points. Hence, perhaps,
this year is probably a good year for our leaders to hold a general election!
By Pauline Yong
13-3-2007
China’s People Daily Online reports: “If the Chinese markets catch a cold,
the major markets around the world will sneeze.” Yes, for the first time,
the Chinese stock market has affected global markets, and it won’t be the
last. On February 26, Shanghai stocks shed nearly 9%, the highest daily
slump for the Chinese stocks in ten years. The Dow Jones Index fell more
than 500 points at one time during the day, and our KLCI shed more than
13% (or 162 points) in 5 trading days. Will our Bursa Malaysia sustain the
blow?
Firstly, let’s compare our current KLCI’s PE (price earning ratio) of 17 with
Shanghai Composite Index’s PE of close to 40, who has the possibility of a
greater fall? Hence, the clash of Shanghai stocks appeared as unsurprising
for many analysts.
Next, by browsing through our key economic indicators, it seems that our
economy is experiencing a phenomenon known as “Goldilocks Economy”.
This is a term used to describe an economy as “not too hot, not too cold,
but just right.” Our CPI has softened down to 3.7 in October 2006, inter-
bank overnight interest rate maintained at 3.5%, our GDP has a healthy
moderate growth of an average of 5.7% in 2006. Our economy is mostly
driven by strong domestic consumption and private investment. We have
a very high savings rate of close to 40% of GNP, one of the highest in the
world. (US’s savings rate is less than 1%). Our banking system is sound
with 5% to 7% of NPL (Non performing loan) to total loans as compared
with more than 12% in 1998.
Moreover, as unit trusts are gaining popularity among the citizens, more
savings will be invested into our local stock market. This scenario is
similar to what happened in the US and Canada during the mid 1990’s,
where they were investing in a wide variety of mutual funds, ranging
from local US Funds, Emerging Markets Funds, European Funds, Bond
Funds and so on. Interestingly, the term ‘goldilocks economy’ was
originated in the US during that time.
However, as Malaysia is an open economy, we face threats from around
the world - the possible financial turmoil in the U.S., the rising crude oil
prices that lead to inflation which will in turn raise our interest rate,
terrorist activities, and of course the Chinese stock market bubble.
All in all, I still maintain an upward trend view for our KLCI, and I believe
it has a very strong support level at around 900 points. Hence, perhaps,
this year is probably a good year for our leaders to hold a general election!
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