Money in housing, cautious optimism in industry

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PETALING JAYA: The property market is expected to remain cautiously optimistic in 2023, with the gradual increase in the Overnight Policy Rate (OPR) since last year likely to affect market activity, particularly on residential demand, says the Valuation and Property Services Department.

The outlook of the workforce in the construction sector and the increase in the price of building materials will also affect supply.

Department director-general Abdul Razak Yusak said internal and external factors, such as economic and financial developments both globally and in the country, would also have an impact on the real estate sector and the sentiment of industry players.

“Looking at the national economy which is projected to grow by 4% to 5% in 2023, supported by continued resilient domestic growth prospects, the property market is expected to remain cautiously optimistic in 2023,” he said.The first quarter of this year alone saw over 89,000 transactions worth RM42.31bil, which was higher than those recorded in pre-pandemic years, he said.

“The seasonal factor in house purchases, which is usually low at the beginning of the year, the increase in OPR and the decline in Consumer Sentiment Index (CSI) are among the factors that contributed to a decline in residential market activity in particular,” he said.

New residential launches, said Abdul Razak, were also indicating a cautious sentiment among developers, with the number recorded at nearly 4,700 units, which was less than those in previous years, while sales performance was moderate at 25.7%.

The decrease in new launches was in line with the decrease in the number of developers’ licences and advertising and sales permits of new housing sales and renewals approved by the Local Government Development Ministry from 5,641 in January and February last year to 2,911 during the same period this year, he added.

Johor recorded the highest number of new launches at 2,077 units or about 45% of the nationwide total with a sales performance of 24.9% while Selangor had the second highest at 791 units or 17% share with a sales performance of 37%.

Abdul Razak said in line with the cautious sentiment among developers, construction activity had slowed down in the first quarter of 2023.

“This is seen as a positive development to balance the unsold supply in the market,” he said, adding that the residential and serviced apartment overhang status continued to be positive.

“The number of overhang units has decreased to 26,872 units worth RM18.31bil in the first quarter of 2023 as a result of market absorption in all states, except Selangor. The volume and value of residential overhang decreased by 3.2% and 0.5% respectively compared with the fourth quarter of 2022,” he said.

Selangor recorded the highest number and value of overhang units, with 4,995 units worth RM4.47bil, followed by Johor at 4,759 units worth RM3.94bil, Kuala Lumpur with 3,423 units worth RM3.13bil, and Penang with 3,138 units worth RM2.48bil.

The purpose-built office (private) and shopping complex segment in Kuala Lumpur and Selangor, said Abdul Razak, should be given attention as there was a surplus of space, which was also expected to be severely affected by the inflow of new supply this year.This is as Kuala Lumpur recorded the highest available private purpose-built office space at 2.53 million square metres involving 290 buildings, followed by Selangor with 1.40 million square metres involving 192 buildings.

For the shopping complex segment, Selangor recorded the highest available retail space nationwide at 0.79 million square metres with 146 buildings followed by Kuala Lumpur at 0.56 million square metres with 97 buildings.

“Developers need to be more thorough and cautious before planning any new development and local authorities need to evaluate in detail before approving each new project,” said Abdul Razak.

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Interest and inflation rates, how high is high?

 

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AS we welcome 2023, one of the central themes this year will be how high will interest rates rise after the relentless pursuit taken by global central banks in fighting inflation with persistent and measured rate hikes in 2022.

As can be seen from Chart 1, from the 75 basis points (bps) hike by the Bank of Thailand to the 425 bps hike by the US Federal Reserve (Fed), the year 2022 has certainly been a busy year for central banks.

Central banks had no choice but to raise rates to fend off inflationary pressure that has been persistent throughout the year, although there have been some signs of easing lately.

Not to be left behind, even the Bank of Japan, while not lifting key benchmark rate, allowed its 10-year Japanese government bonds to move 50 bps from its 0% target, instead of 25 bps earlier.

It is a move that is seen recognising that inflation is finally biting the Japanese too.

 

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 Chart 2 shows that based on November 2022 statistics, the depositors are at the losing end as the 12-month deposit rate was 132 bps lower than the monthly inflation print of 4%.

Can inflation be tamed?

Reading inflationary pressures and forecasting where it is going is not an easy task especially when inflation prints itself is a combination of many factors and not just commodity prices and supply chain disruption that has been the core issues among central banks the past year. Although the global economic momentum has eased, global aggregate demand is still rising and much higher than it was before the pandemic.

Hence, there has been not only a persistent rise in consumer demand but one that is not matched by consistent supply provided in the marketplace, resulting in a hike in aggregate prices.

In theory, inflation is tamed by using monetary tightening measures as it is believed that by raising interest rates, consumers and businesses will be impacted by higher borrowing costs, resulting in lower consumption as well as a slower pace of investments, which in turn will reduce aggregate demand.

Nevertheless, rate hikes have also other consequential impacts on the economy in the form of a weaker or a stronger currency, depending on the relative increase in domestic rates vis-à-vis the comparative increase in other corresponding currencies.

For example, for the United States, the relentless increase by the Fed has caused a significant rally in the US Dollar Index, which rose to a high of US$114 (RM501) last year, up almost 20%, before easing to close the year at US$103 (RM454), down 9.3% from its peak, but still higher by more than 8%.

The surge in the dollar made US imports cheaper from the rest of the world, in particular those from China, even cheaper, which allows the US retail prices at the store to be relatively lower than they used to be before the rally in the dollar.

In essence, while the surge in US interest rates has reduced disposable income due to higher borrowing costs, which in turn lowered consumer demand, it has also caused imported end product prices to be relatively cheaper than before, allowing aggregate prices to be lower as well.

This suggests that US consumer products are in for a double-whammy in terms of prices as aggregate demand has been reduced due to lower disposable income and at the same time for products that are imported, prices too have eased due to the strength of the greenback.

For an economist, this is good news as the intended outcome will likely be achieved in taming inflationary pressure due to persistent hikes in interest rates. A look at inflation prints from the peaks in 2022, both the core Consumer Price Index (CPI) and the Personal Consumption Expenditures index (PCE) have eased, falling by 67 bps and 62 bps from the highs and were last seen at 6% and 4.7% respectively.

Are we there yet?

After a 425 bps hike, the Fed’s message in the minutes of the Federal Open Market Committee (FOMC) released this week was an important one as it guided the market to expect higher rates going into 2023 but at the same time also signalled that the war against inflation is far from over and the Fed will continue to raise rates until it can achieve its targeted inflation print.

Compared with its September forecast of 4.6%, the Fed has now raised its median Fed Fund Rate (FFR) for 2023 to 5.1%, an increase of 50 bps while at the same time, the Fed also expects median FFR to drop by 100 bps each in 2024 and 2025 to 4.1% and 3.1% from earlier projected rate of 3.9% and 2.9% respectively.

Core PCE inflation, which is the Fed’s benchmark rate for inflationary pressure, is now expected to hit a median rate of 4.8% in 2022 before easing to 3.5% and 2.5% in 2023 and 2024 respectively.

By all means, the Fed is forecasting that inflation will be tamed in time to come. Hence, in all likelihood, we have seen the peak in inflationary pressure but perhaps we will be in for a higher US rate for longer before we see the Fed’s pivot.

Contrary to market expectations, the FOMC minutes this week revealed that the Fed is not expected to cut rates in 2023.

As for the market, based on Fed Fund Futures the Fed is expected to raise the FFR by 25 bps each over the next three meetings to reach 5.00% and 5.25%, followed by two rate cuts of 25 bps each in the second half of 2023, bringing the FFR back to 4.5% and 4.75% at the end of 2023.

Bank Negara to stand pat?

Compared to many central banks in the region or globally, Bank Negara move to raise the benchmark Overnight Policy Rate (OPR) by 100 bps last year is seen as rather muted.

Based on the year-to-date core CPI of 2.9% up to November 2022, the inflationary pressure experienced by Malaysia remained within Bank Negara’s forecast of between 2% and 3% for the year and going into 2023, core inflation prints will remain elevated at the beginning of the year but may ease later on, especially with the current government’s efforts in reducing the cost of living.

Given that scenario and the likelihood that the Fed and other regional central banks too are almost done raising rates, Bank Negara may stand pat and leave the OPR unchanged for 2023 at 2.75%. After all, a higher rate of between 25 bps to 50 bps as predicted by many broking firms will only result in higher borrowing costs for consumers and businesses, a move that will likely accelerate the pace of economic slowdown in 2023. By leaving the OPR unchanged, Bank Negara is signalling that it is done with raising rates and the current rate remains commodative and supportive of economic growth.

Positive real returns?

One of the arguments for higher interest rates is whether depositors are getting positive real returns, which is the difference between fixed deposit rates and inflation prints.

Chart 2 shows that based on November 2022 statistics, the depositors are at the losing end as the 12-month deposit rate was 132 bps lower than the monthly inflation print of 4%.

However, interestingly, as the market is anticipating rate hikes of 25 bps in the January 2023 Monetary Policy Committee meeting and another hike in March 2023, 12-month fixed deposit rates of many banks have passed the 3% mark and depositors could even easily enjoy rates up to 4% as promotional activities to attract fresh deposits have intensified over the past month. With that, depositors are already getting returns close to the headline monthly inflation prints.

In conclusion, while it makes sense for Bank Negara to stand pat and not raise rates in its first two meetings this year as widely expected, the market has already priced in the scenario that the central bank is ready to raise rates by 50 bps to take the benchmark OPR to 3.25%, the level last seen in March 2019, almost four years ago.

   Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.

Riding on higher rates

When the Overnight Policy Rate (OPR) increases, banks can charge higher interest rates on loans, which expands their margins. But, there are other beneficiaries of higher OPR, including fixed deposit holders.

 

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Recession fears can by itself be a self-fulfilling prophecy

AS talk of a recession picks up, a veteran fund manager, Ang Kok Heng of Phillip Capital Management Sdn Bhd, correctly points out that the Malaysian stock market has been in “recession” in five of the six years since 2014.

Hence, he does not envisage how it can get worse for the Malaysian stock market if the global economy does go into a recession next year. Fears of a global recession have picked up pace based on the behaviour of the US yield curve.

The yield curve, which charts the spreads of US debt papers of various tenures, has inverted several times in the past few weeks. Most people would not understand what an inverted yield curve means.

Simply put, it means long-dated debt papers of 10 years giving lower returns compared to shorter-term debt papers such as two-year US Treasuries. It causes what is called an inverted yield curve.

It goes against the normal behaviour of US Treasury yields because long-term debt papers should give a higher return than short-term papers.

The consequence of an inverted yield curve is that it will lead to banks reducing their lending activities because their margins are narrow. Eventually, it results in companies reducing their activities and the country going into a slowdown or recession.

An inverted yield curve has been the precursor to all past recessions (see diagram).

However, there are some who are disputing the fears of an impending global recession based on the behaviour of the bond yield curve. Their reason is that the bond yields are not behaving as what they should due to the governments all around the world printing money to keep interest rates artificially low since 2009.

Interest rates have become so low to the extent that European banks are offering no returns on deposits. This means depositors do not get any money for keeping their money in the banks. Borrowers instead get discounts on their installments.

It’s happening in Europe because government bond yields there have turned negative.

For instance, the yield on 10-year Switzerland bonds is negative 0.74%, while German bonds of a similar tenure yield negative 0.52%. From France to Denmark, government debt papers have negative yields.

Only some countries such as Portugal and Spain still have positive yields on their debt papers.

Analysts believe that this has resulted in investors resorting to buying US debt papers that still offer positive yields. Hence, the price of bonds across all tenures in the US has gone up, causing their yields to come down.

The search for yields has also resulted in the narrowing of the difference between what the two-year and 10-year debt papers offer. And there have been several occasions in the last one month when the yield on the 10-year paper was lower than the two-year debt papers.

Apart from the behaviour of the yield curve, the other indicator that is seen as a precursor to a recession is the declining manufacturing sector all around the world caused by the trade war between the US and China. The Purchasing Managers’ Index (PMI), which is a leading indicator to assess the state of the economy, has been declining for all major economies.

For Malaysia, the PMI has been less than the 50-point benchmark for almost a year now. The same trend is seen in China, while the indicator has started to decline in the US in the last few months, which some see as a result of the trade war.

The trade war has caused supply disruptions, impacting the manufacturing sector.

However, there are other indicators that do not indicate a recession is imminent.

Banks are fairly well-capitalised and have pulled the brakes on lending. We do not hear of banks being impacted by major corporate defaults except for some financial institutions in China. Malaysian banks, for instance, have weathered the storm quite well so far, thanks to Bank Negara keeping a tight rein on their lending activities.

There has not been any run-up in asset prices. Property prices in countries such as Malaysia have remained subdued since 2015 after Bank Negara pulled the brakes on lending. Since 2014, Bursa Malaysia has closed lower every year, except for 2017.

The only exception of rising asset prices is Wall Street that has soared to record highs. Stock prices are hitting all-time highs due to improved earnings growth.

Technology companies such as Apple and Amazon are US$1 trillion companies. The other technology companies such as Facebook and Alphabet are enjoying growing valuations because of earnings growth.

No other stock exchange in the world has such a large concentration of technology companies than the exchanges on Wall Street. All technology companies, even from China, want to list on Wall Street.

Even Alibaba is listed on the New York Stock Exchange and not in Hong Kong.

It has been 11 years since the last recession, but the world’s central banks have resumed their printing of cheap money to keep interest rates low. The European Central Bank has resumed quantitative easing, while the US Federal Reserve is reducing interest rates. In essence, central banks are taking these measures to prevent a slowing economy going into recession.

In the meantime, it has caused fear among people and companies. Companies are holding back on spending, and in fact, cutting down on their debt.

A clear indicator is in the US where companies raised the most amount of corporate debt. Apple and Disney raised US$7bil worth of debt papers to reduce their borrowings.

In Malaysia, corporations have been deleveraging for the past few years in anticipation of a slowdown. Companies are not expanding, as indicated by the declining private-sector gross capital formation.

It is only reasonable for companies and people to save for the upcoming rainy days. Even governments are cautious in spending. For instance, in the upcoming Budget 2020, many are expecting the government to start spending. But there is also a view that the government will adopt a cautious stance as it continues to strengthen its balance sheet and reduce debts.

If nobody spends for fear of a recession, it would be a self-fulfilling prophecy.

Most people are expecting a recession, meaning negative growth. Fear of a recession has translated into a slowdown that the world and Malaysia are experiencing. If this fear continues to perpetuate, a recession would be a self-fulling prophecy.

It is good to be fearful, but being too fearful and conservative will also result in lost opportunity.

As Ang of Phillip Capital puts it, in times when fears of a recession seap in, cash must be held to seize opportunities. Holding cash as an investment is not a wise option.



 By M. SHANMUGAM , The views expressed here are solely that of the writer. Source link


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Why the US dollar will remain strong despite cheap money at near zero interest rates?

 

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THE Fed failed to raise interest rates on Sept 21, giving many markets and fund managers a sigh of relief.

Fed chairman Janet Yellen said the case for an increase has strengthened, but decided for the time being to wait for further evidence of continued progress toward the Fed objectives of maximum employment and price stability. Some analysts felt that any Fed rate increases would be seen as favouring one party in the US Presidential elections.

Caution having over-ridden valour, overall stock markets rallied somewhat, while currency markets moved sideways. Going forward, the futures market think that there is a 60% chance of the Fed raising interest rates in December, after the November Presidential elections.

The key question is whether the dollar will strengthen. So far, the US dollar has been strong against emerging market currencies, flat against the euro and weakened relative to the yen.

There are hoards of analysts trying to forecast short-term and long-term exchange rate movements. Exchange rates are determined by the supply and demand in currency pairs, usually between the dollar and the most traded currencies, such as euro, sterling, yen and other liquid currencies (Australian dollar etc). In turn, the supply and demand for foreign exchange would depend on the current account (trade flows) and capital account (financial flows) of the balance of payments.

If one only looked at trade flows, then exchange rate expectations would depend on whether countries are running large current account surpluses or not, on the basis that a surplus country’s currency would strength. On that basis, one would expect that the Euro should strengthen, because the eurozone is now overall running a current surplus of roughly 3% of GDP. Germany alone is runnng a current account surplus equivalent to 8% of German GDP. However, investor nervousness about the sluggish outlook for the eurozone has keep the euro on the weak side.

One reason is that capital flows are now driving the exchange rate, due to large portfolio flows in search of yield and total returns, as financial assets become more globalised. Theoretically, portfolio flows should be driven by covered interest rate parity, meaning that foreign exchange traders arbitrage in spot, forward and futures markets to equalise risk-adjusted interest rates between countries. Hence, expectations of interest rate differentials between countries matter in shaping exchange rate behaviour.

Interest rate behaviour is determined today largely by monetary policy, which is why global markets are particularly nervous about US Fed interest rate adjustments. Since the US dollar is the world’s benchmark currency, with roughly two thirds of global financial assets measured against the dollar, global financial markets move in expectations of future Fed interest rate increases.

The US remains the dominant military and economic power and is consequently the safe-haven currency. Whenever geo-politics become tense, as is the situation currently, the flight is always towards the dollar.

Furthermore, all signs point towards the US economy performing best amongst the advanced economies, despite overall slower growth post-crisis.

There is enough evidence that the US is already reaching full employment levels at 4.9% unemployment rate, with anecdotal evidence that companies are hiring in anticipation of growing consumer confidence.

There is however a disconnect between US recovery and trade growth. The US consumption pattern has changed from consuming durables towards spending on services, such as new apps and digital entertainment. A partial shift towards manufacturing at home also explains why exports to the US have not increased substantially. With global trade growing slower than GDP, emerging markets are not growing due to the traditional cyclical uptick in exports.

The bad news is that historically, a strong dollar has been associated with slower global growth and vice versa. The explanation is that when the dollar is weak, capital flows out to the emerging markets, stimulating trade and investments. When the dollar is strong, capital flows back to the US and if the US is unable to recycle these flows, global growth weakens.

As the taper tantrum in 2013 showed, when the Fed signalled an increase in interest rates, emerging markets suffered huge turmoil of capital outflows, leading to either interest rate increases or sharp devaluations.

The power of the US to recycle global capital flows is critical to global recovery. Unconventional monetary policy in the US, in the form of near zero interest rates, is not working because the transmission mechanism of cheap money to the real economy is not working. Liquidity remains within the central bank-financial market nexus, with relatively slow lending to finance private sector long-term investments. The private sector is also not confident about the future until there are stronger signs of sustained consumer spending. Furthermore, much-needed public sector investments in infrastructure are being constrained by the large debt overhang and toxic politics.

In short, global capital flight to the dollar, with near zero interest rates, will mean global secular deflation. The reason is that zero interest rate dollar holdings have the same deflationary role as gold in the 1930s. Holding gold was deflationary because spending stops as more and more gold hoarding drained liquidity from the market.

Wait a minute. If the Chinese economy is still growing three times faster than the US in GDP terms (6.7% versus 1.8%), shouldn’t the yuan appreciate? Yes, China is running a current account surplus, but capital outflows are currently running about the same level as trade surpluses, so foreign exchange reserves are flat. Many people think that capital outflows indicate that the yuan will remain weak against the dollar until private sector confidence recovers.

The European and Japanese central banks are running negative interest rate policies precisely because with interest rates relatively lower than the dollar, capital flows will induce lower exchange rates, which will hopefully reflate their economies. The Fed has exactly the same fear as the People’s Bank of China in 2009 when China was growing at more than 10% per year.

Higher Fed interest rates would attract higher capital inflows, pushing up the dollar and inducing even higher asset bubbles, with no inflation in sight.

In sum, much will depend whether the US will use more fiscal stimulative policies and less of unconventional monetary policy to revive productivity growth. It looks as if we will have to wait for a new President to make that strategic call. We will know by November,

By Andrew Sheng

Tan Sri Andrew Sheng is Distinguished Fellow, Asia Global Institute, University of Hong Kong.

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The Age of Uncertainty

We are entering the age of dealing with unknown unknowns – as Brexit and Turkey’s failed coup show

 

The dark future of Europe

THE Age of Uncertainty is a book and BBC series by the late Harvard economist John Kenneth Galbraith, produced in 1977, about how we have moved from the age of certainty in 19th century economic thought to a present that is full of unknowns.

I still remember asking my economics professor what he thought of Galbraith, one of the most widely read economists and social commentator of his time. His answer was that Galbraith’s version of economics was too eclectic and wide-ranging. It was not where mainstream economics – pumped up by the promise of quantitative models and mathematics – was going.

Forty years later, it is likely that Galbraith’s vision of the future was more prescient than that of Milton Friedman, the leading light of free market economics – which promised more than it could deliver. The utopia of free markets, where rational man would deliver the most efficient public good from individual greed turned out to be exactly the opposite – the greatest social inequities with grave uncertainties of the future. Galbraith said, “wealth is the relentless enemy of understanding”. Perhaps he meant that poverty and necessity was the driver of change, if not of revolution.

The economics profession was always slightly confused over the difference between risk and uncertainty, as if the former included the latter. The economist Frank Knight (they don’t make economists like that anymore) clarified the difference as follows – risk is measurable and uncertainty is not. Quantitative economists then defined risk as measurable volatility – the amount that a variable like price fluctuated around its historical average.

The bell-shaped statistical curve that forms the conventional risk model used widely in economics assumes that there is 95% probability that fluctuations of price would be two standard deviations from the average or mean.

For non-technically minded, a standard deviation is a measure of the variance or dispersion around the mean, meaning that a “normal” fluctuation would be less than two; so if the standard deviation is say 5%, we would not expect more than 10% price fluctuation 95% of the time.

Brexit may represent the final rejection of Tony Blair’s legacy of globalisation

Events like Brexit shock us because the event gave rise to huge uncertainties over the future. Most experts did not expect Brexit – the variance was more than the normal. It was a reversal of a British decision to join the European Union, a five or more standard deviation event – in which the decision is a 180 degree turn. The conventional risk management models, which are essentially linear models that say that going forward or sequentially, the projected risk is up or down, simply did not factor in a reversal of decision.

In other words, we have moved from an age of risk to an age of uncertainty – where we are dealing with unknown unknowns. There are of course different categories of unknowns – known unknowns (things that we know that we do not know), calculable unknowns (which we can estimate or know something about through Big Data) and the last, we simply do not know what we may never know.

Big Data is the fashionable phrase for churning lots of data to find out where there are correlations. The cost of big computing power is coming down but you would still have to have big databases to access that information or prediction. Most individuals like you and me would simply have to use our instincts or rely on experts to make that prediction or decision. Brexit told us that many experts are simply wrong. Experts are those who can convincingly explain why they are wrong, but they may not be better in predicting the future than monkeys throwing darts.

Five factors

There are five current factors that add up to considerable uncertainty – geopolitics, climate change, technology, unconventional monetary policy and creative destruction.

First, Brexit and the Turkish coup are geo-political events that change the course of history. In its latest forecasts on the world economy, the IMF has called Brexit “the spanner in the works” that may slow growth further. But Brexit was a decision made because the British are concerned more about immigration than nickels and dimes from Brussels. This is connected to the second factor, climate change.

Climate change could make Middle East 'uninhabitable', according to study

Global warming is the second major unknown, because we are already feeling the impact of warmer weather, unpredictable storms and droughts. Historically, dynastic collapses have been associated with major climate change, such as the droughts that caused the disappearance of the Angkor Wat and Mayan cultures. Iraq, Afghanistan, Syria, Sudan and all are failing states because they are water-stressed. If North Africa and the Middle East continue to face major water-stress and social upheaval, expect more than 1 million refugees to flood northwards to Europe where it is cooller and welfare benefits are better.

The third disruptor is technology, which brings wondrous new inventions like bio-technology, Internet and robotics, but also concerns such as loss of jobs and genetic accidents.

Fourthly, unconventional monetary policy has already breached the theoretical boundaries of negative interest rates, where no one, least of all the central bankers that push on this piece of string, fully appreciate how negative interest rates is destroying the business model of finance, from banks to asset managers.

Last but not least, the Austrian economist Schumpeter lauded innovation and entrepreneurship as the engine of capitalism, through what he called creative destruction. We all support innovation, but change always bring about losses to the status quo. Technology disrupts traditional industries, and those disappearing industries will create loss in jobs, large non-performing loans and assets that will have no value.

Change is not always a zero-sum game, where one person’s gain is another’s loss. It is good when it is a win-win game; but with lack of leadership, it can easily deteriorate into a lose-lose game. That is the scary side of unknown unknowns.

I shall elaborate on how ancient Asians coped with change in the next article.

By Tan Sri Andrew Sheng

Tan Sri Andrew Sheng writes on global issues from an Asian perspective.

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