We talk to international economist Shan Saeed on the economic and real estate outlook for 2Q and 3Q 2016.
It has been a very eventful 2015 for the global markets with currency and stock volatility and falling oil prices affecting market sentiments. Just when you think things couldn’t get any worse, a bloodbath in the market welcomed the beginning of 2016 prompting some panicked analysts and bankers to declare doomsday scenarios in the coming months. Fast forward four months later from January and we see things settling to a less combustible state.
The US Federal Reserve has indicated a more moderate stance in interest rate hikes for this year – this has largely calmed the markets. Meanwhile, a semblance of rationality has also appeared to descend upon major oil producers who have mostly agreed to limit oil production output – that and a ‘controlled’ slowing down of China’s economy have led to a breather to the gyrations. One publication has even headlined it “Is The Worst Over For Emerging Markets?” after markets there witnessed a slight uptick in sentiment.
Oil prices have gradually climbed up to more sustainable levels after hitting the lows. At the time of writing, the oil price was hovering around USD47 a barrel, nowhere near its previous long-term high of over USD100 a barrel.
‘NOT OUT OF THE WOODS’
What can we expect next?
[ihc-hide-content ihc_mb_type=”show” ihc_mb_who=”1,2,3,4,5″ ihc_mb_template=”1″ ]“We are clearly not out of the woods yet as globally, things will stay volatile in terms of market performance; plus sovereign debt risks will continue to remain high,” says Shan Saeed, a contrarian economist attached to IQI Group, a Dubai-based real estate investment firm.
“Having said that, the progress of each country particularly in Asia varies greatly. Countries that have a positive outlook would be those that have a solid infrastructure, rising income levels, economic progression that’s still very much on the upsurge and most importantly high or increasing confidence level.”
“The two factors that are currently driving Asian economies are confidence and fear. Confidence is a very important barometer because it’s like an appreciating asset. Take for example Dubai – why do around 3,000 – 5,000 foreigners arrive in Dubai everyday looking for jobs? Because they are confident that there will be jobs there because of the vibrant economy. Similarly, many foreigners come to Malaysia everyday looking for jobs – it’s an indication that there is confidence in the Malaysian economy.
“Compare that with Spain which has an unemployment rate of 40 – 50%. That means half the population there are not doing anything productive, hence the GDP size is shrinking. Not surprisingly, Spain falls into the Global Economic Fear Index (developed by the same people). Accompanying Spain are Greece, Japan (Abenomics has failed and an aging population doesn’t help), Italy, Bulgaria, Hungary and Portugal, among others.”
MALAYSIA – UNDERRATED GEM
One of the brightest stars to have emerged from the bloodbath is Malaysia. Its currency was among the best performing in Asia since January. Malaysia is also a signatory to the TPPA (Trans-Pacific Partnership Agreement) making it an important participant in the global economy in the next 10 years. Even more significant is the fact that Malaysia has the most strategic location in ASEAN (Association of Southeast Asian Nations), with its western coastline of Peninsula Malaysia right next to the strategic Strait of Malacca, where 80% of the oil going to China passes through. The Strait of Malacca is a narrow, 805km stretch of water between Peninsula Malaysia and the Indonesian island of Sumatra.
“The Strait of Malacca is very strategic to China; as a result, China would not leave Malaysia for the next 100 years,” Shan quips. The evidence seems to support his prediction. In October 2015, China pledged to invest RMB100 bil (USD15 – 16 bil) in Malaysian government securities (MGS),” says Shan, who is also IQI’s investment strategist. To date, China has started the buying momentum and this inflow could rise to 50 bil yuan in total, according to reports.
Melaka is also attracting the interest of the US and a number of superpowers which want to have a stake or say in the strait. “The Strait of Malacca is one of the world’s hottest and most crucial strategic choke points,” declares Yossef Bodansky, a security expert in his paper on “Beijing’s surge for the Strait of Malacca” written way back in 1995.
It’s no wonder that Melaka and Guangdong have been declared twin states and China has proposed to pump in at least RM20 bil into building the Melaka-Guangdong Industrial Park which will house an industrial area. In the plans also are a marine park and the redevelopment of Melaka’s port and harbour which would form part of China’s “21st Century Maritime Silk Road” project.
On the corruption scandals that might have the effect of derailing growth in Malaysia, Shan dismisses that possibility. “Corruption is endemic anywhere in the world including the US and Europe. In fact, the biggest problem plaguing Europe today is corruption followed by lack of productivity,” says Shan, citing statistics from the RAND Corporation, a research organisation that develops solutions to public policy challenges.
Rand’s analysis came up with the figure of a whopping €990 billion in GDP terms being lost annually to corruption in the European Union. That’s more than eight times the existing estimate and about “6% GDP of EU”, Shan estimates, adding that “Malaysian corruption is nothing [compared to the scale in EU]”.
It’s safe to say Malaysia looks set to see brighter days in the coming months. With oil prices climbing back to more sustainable levels, the Malaysian Ringgit is expected to bounce back to about RM3.80 – RM3.90 this year, which is its fair value, according to Shan. Between January-March 2016, the Ringgit has risen by 10.3% against the dollar.
Furthermore, optimism is on the cards now that the new Central Bank governor has been announced. A graduate of Harvard University, Datuk Muhammad Ibrahim has served as the deputy governor since 2010 and most anticipate few, if any, significant changes to the current central bank’s policy. Hence, with better commodity and oil prices, confidence in Malaysia will gradually increase (1MDB notwithstanding).
The only other downside risk is the risk of competitive devaluation should China devalues the Yuan. Beijing wants the Renminbi to depreciate to stimulate its economy and to keep its export momentum; “it’s all part of China’s tactical maneuvering and that’s good”, says Shan.
In terms of real estate, when confidence returns, and if the new Central Bank governor makes it easier for banks to lend in the property industry, Malaysia can become the brightest contender in ASEAN attracting many more investors including multibillion dollar investors. Until then, it pays to keep the country in the radar for now and the foreseeable future.