KUCHING: It has been a very trying year for many countries in 2011, with a series of eco-nomic woes, natural disasters, political upheavals to name just a few.

With Japan being hit by the tsunami-earthquake disaster, Middle East experiencing a political revolution, Thailand with its extensive floods and not forgetting the eurozone debt crisis which seems to go on and on, market players are losing confidence as well as patience with the once-lead-ing countries in the global economic race.

Many are instead switching their focus towards emerging markets, which will see much emphasis in 2012.

Malaysia, as one of the emerg-ing markets, is comparatively looking more attractive to both domestic and international investors alike. Albeit, the country’s projected growth has taken a slight dive from these external factors in 2011.

RAM Holdings Bhd (RAM Ratings) economist Jason Fong revealed to BizHive Weekly that earlier in the year, RAM Eco-nomics projected a growth of 5.6 per cent in February but subse-quently moderated the forecast to five per cent in August.

“The forecast revision was largely due to the unexpected external events such as the debt ceiling crisis in the United States, which occurred for most of the first half of the year; the natural disaster in Japan and the extent of the Middle East geopolitical crisis,” he added.

This revision for 2012 came as no surprise as all events on the global scale would affect Malay-sia one way or the other.

As a small open economy dependent on export, RHB Re-search Capital Sdn Bhd (RHB Research) head of research Lim Chee Sing believed Malaysia was and will continue to be affected by major changes worldwide.One aspect to look out for, he noted, was in trade and exports.

“Exports account for about 110 per cent of GDP,” Lim stressed. “If the euro debt crisis worsens and drags the European econo-mies into a deeper recession, it will affect the US and the rest of the world.

“Under such circumstances, the Malaysian economy can-not be spared whether you like it or not. Slowing economic growth implies weak corporate earnings which will affect com-panies’ growth prospects and, therefore, valuations.”

ECM Libra Capital Research Sdn Bhd (ECM Libra) junior economist Mohd Hafiz Noor Shams supported this, stating that recession in Europe and moderation in China would low-er trade with Malaysia, hence impacting the overall GDP. “This is an especially impor-tant point given that Malaysia is a small open economy.”

Nevertheless, HwangDBS Investment Management Bhd (HwangDBS IM) head of equi-ties Gan Eng Peng noted that Malaysia would still outper-form its regional peers as the country has always been a ‘defensive’ market.

“That means in volatile times, our market will drop less com-pared with our regional counter-parts. However, during good times, the pick-up will be less too, coming from a higher base.”

Domestic pillars of support

Many events are mapped out for the year 2012 that will excite the market either directly or indirectly. This was indicated under Budget 2012 announced in October last year, with several key initiatives highlighted to flow into the year.

These included Strategic Reform Initiatives, Second Rolling Plan, the Kuala Lumpur Financial International District, several key listings and other pro-posals.

“Budget 2012 is also aligned to the ETP, which is to achieve a high income na-tion status by 2020. To achieve that, the nation’s competitive edge and talent pool skills are paramount to Malaysia’s success,” outlined HwangDBS’ Gan.

“As a country, where we need to start looking is to give priority and allocate resources to overhaul the quality of the public education system, as it ultimately determines the calibre of the talent pool generated for the work force.

“Political will is not sufficient if there is no depth and com-mitment to the policies implemented to turn around our education system.

However, if it is done right together with the execution of the ETP, the future will look bright.”

Key listings in 2012

With major new listings in the pipeline, proposals to list Felda Global Ventures Holdings (FGV), Gas Malaysia and Integrated Healthcare Holdings are believed to still be on track for 2012.

In addition, the merger of SapuraCrest and Kencana is also expected to be completed with the new entity, currently named Integral Key Bhd (Inte-gral Key) likely to be listed by February with an estimated market capitalisation between RM9 to RM10 billion.

While Gas Malaysia’s listing is unlikely to affect the mar-ket’s position on the oil and gas sector in Malaysia, Lim from RHB Research said the Integral Key’s listing was likely to expand the O&G sector’s influence on the market.

“We believe Integral Key has the right complimentary businesses and assets, and is big enough to create a formi-dable competitor against the international oilfield services companies,” he appended.

Meanwhile, FGV’s listing would likely increase the plantation sector’s weighting in Malaysia’s key benchmark equity indices.

General Elections

The General Elections (GE) will be another main event in 2012 to leave its imprints on the financial markets.

Although Prime Minister Datuk Seri Najib Razak does not have to call for the next general election until March 2013, the market has been constantly anticipating an earlier date.

RHB Research’s head of re-search, Lim, opined that the election would create more volatility for the local bourse.

“While this could translate to positive news flow for the perceived election related stocks, any significant share price performance would likely be temporary,” he commented.

“Apart from being overshad-owed by external factors, elec-tion could also be a double edged sword as uncertainty on the outcome of the election results could cause investors to reduce their equity exposures upon the announcement of dissolution of the parliament or closer to election date, creating more volatility to the market.

” Lim further believed market reactions would be similar to the Sarawak state election, causing the market to fall into a correction mode.

The market, however, recovered quickly after the state election as BN retained its two-thirds majority.

ECM Libra’s Hafiz, supported this view, believing the impact from the election would only be a transitionary one.

“Compared with the general election, the implementation of the ETP will become the pillar supporting the domestic economy if political pressure does not delay the implementa-tion further.

“The effect of the general election, however will be transitory and will last for a relatively short period, unless there is an unlikely significant power change.”

RHB Research’s Lim noted that although this was an im-portant event, it would still be likely to be overshadowed by external developments in his view.

ETP Progress

One cannot observe Malaysia’s big picture and overlook the ETP.

This longterm programme, set to propel various sectors going forward, will see the culmination of efforts from both government and private entities to undertake several construc-tive efforts.

“While Malaysia’s external sector has experienced a series of shocks from external events, the domestic oriented sector had managed better than anticipated growth,” said RAM’s Fong.

“Private consumption growth was strong as a result of income effects from higher commodity prices and a relatively accom-modative interest rate environment.

Domestic investments this year have grown due to the physical capital requirements of the ETP.”

Speaking on the ETP, Gan said the key indication of success for this initiative was its timely and progressive execution, covering aspects such as the efficient use of money and better account ability of mistakes.“When the ETP was unveiled in October 2010, there was a lot of excitement, attention by the foreign investing community and high hopes.

“One year later, one of the key projects  development of Greater Kuala Lumpur, which includes MRT construction, has been driven back in the drawing board with a new chief executive officer on board.

“One of the key indicators of success for the ETP is the execution of its projects.

This includes focus on driving the projects, efficient use of money, and better accountability for mistakes.

“This expectation has not changed as it is crucial to the progress and completion of the mega projects listed under this national initiative.”

One particular segment to see explosive highlight in 2012 is the construction sector, particu-larly in Peninsular Malaysia’s central region.

External issue to leave its mark

Sources have implied that the major issues next year to impact the capital market or flow of investments would be more influenced by domestic matters (such as the general election), rather than external market issues.

HwangDBS’ Gan believed that the world’s economy would still play a crucial factor in deciding Malaysia’s market outcome.

“The basis of our view is that the world’s economy is still in a fix as there is still no concrete resolution from the eurozone nor the US on how to manage their mount-ing debts, slowing growth and stubbornly high unemployment issues.

“If there is any hint of growth, it will be painfully slow in the developed economies.

Besides, markets are still driven by news and headlines rather than fundamentals.

“And, being in an open economy, Malaysia’s market will be affected by the development and sentiment in the West.

As such, we remain cautiously optimistic on the outlook of 2012, at least in the first half of the year.”

While domestic policy and economic events were expected to be a major determinant of capital market activity in 2012, Fong of RAM believed external events were still likely to have an effect.

To note, Bursa Malaysia had indicated that as at October, foreign institutions represented up to 35 per cent of the KLCI Futures market and up to 20 per cent of total domestic bonds were owned by foreigners.

As a result, a sudden reversal of risk appetite of foreign insti-tutions could have a substantial impact on the domestic capital market.

“Having said that, the external impact on domestic capital markets will largely be dependent on the seriousness of a downturn in external demand or a liquidity crisis in advanced economies, which will cause a reversal of capital flows,” Fong outlined.

“The key external events would therefore be a less than optimal outcome of the European debt crisis next year, major political events (such as elections in the United States and certain European nations coupled with the changing of the leadership structure in China) and further extraordinary monetary policy ac-tions in advanced economies.”

Malaysian Rating Corporation Bhd (MARC) chief economist Nor Zahidi Alias took an opposite stance on the matter.

“On the contrary, I think that external factors will play a bigger role in determining the flows of investments although domestic factors will to some extent influence the financial market.

“This is due to the fact that fragile banking sector in the Eu-ropean countries will likely exert greater influence on the degree of risk taking activities worldwide.

This will undoubtedly affect portfolio flows in many countries including Malaysia.”

Nor Zaidi proposed that the amount of capital flows in the third quarter already indicated an increasing risk aversion among investors whereby net portfolio investment recorded a net outflow of RM23 billion.

“Direct investment also posted a net outflow of almost RM8 billion.

The volatility of capital flows is also expected to rise following investors’ anxiety about the impact of weaker banking sector that may affect lending growth worldwide in 2012.”

He further noted that the region’s exposure to European capital flows would be a primary factor that determined the impact on Asia’s lending growth and the performance of their real economies.

“For instance, European claims against Malaysia stood at 41 per cent of total foreign claims, lower than Singapore’s 55 per cent and the Philippines’ 47 per cent.

“Claims by troubled countries stood at 0.1 per cent of total foreign claims for Malaysia (Indonesia 1.1per cent and the Philippines 0.9 per cent).”

Conclusion

Gan Eng Peng, HwangDBS Investment Management Bhd head of equities

Gan from HwangDBS summed up the general expectations with his apt reply, “To be honest, when will the equity market regain its sanity is anyone’s guess.

“However, the good news is that we believe it is a matter of when, not if, money will eventually start flowing into this region again.”

He based this theory on the fact that investors would not sit on their monies for too long without earning something in return.

“Let’s face it.

Money cannot be sitting on the sidelines earning negative real returns for too long.

So, where else can investors find high single digit returns in the current low growth and low interest rates environment globally?“Asia (ex-Japan), and Malaysia included, look like a sweet spot to be in as they are blessed with better growth prospects due to stronger fundamentals and less leveraged corporate balance sheets compared with their developed peers.”