Weekly Economic Analysis by Manokaran Mottain

By MANOKARAN MOTTAIN

MARKET 20-24 December 2021

THE local stock market rebounded back during the week in line with the regional markets as concerns over the threat posed by the Covid Omicron variant to the global economic recovery recede.

Consequently, the KLCI Index ended the week at +0.96% (+14.44 points) at 1,516.45 points.

There may be further potential window dressing activities for big caps towards the end of the week given the fact that 31st December falls on a Friday as the market may want to end the year on a higher note.

The Securities Commission has liberalized the unit trust fund framework to enable fund management companies to develop more innovative products to complement existing wealth management solutions and allow local funds to remain competitive in a rapidly evolving investment landscape.

The key amendments include expanding the list of permissible investments by unit trust funds, enhancing the operational processes in managing a fund and better clarity on existing requirements for market participants.

As at 31 October 2021, there are 39 locally incorporated fund management companies who collectively offer 734 different unit trust funds that has a total net asset value of RM551.36 billion.

ECONOMY

In the wake of the devastating flood situation in Peninsular Malaysia due to a tropical depression, the importance of food security and basic grocery necessities should be emphasized going forward. The government should do whatever it takes to contain food inflation and ensure food security to the rakyat.  

In addition, the government should also refocus their infrastructure projects towards building better drainage and flood defenses in order to prevent a re-occurrence of the massive floods which inundated heavily occupied housing areas such as Shah Alam and Klang.

It should also make special budgetary allocations to beef up search & rescue assets such as 4WD vehicles and boats in each and every state to ensure the bomba personnel and other agencies are able to mount a rapid and effective rescue response to help flood victims in the future because such an occurrence is almost certain to happen again in the future.

The consumer price index (CPI) for November 2021 rose by 3.3% y-o-y due to persistently high prices of food, fuel and electricity costs. Core inflation registered an increase of 0.9% during the month. Prices of chicken rose by 16.7% as a result of rising feedstock prices while fuel and electricity prices rose by 27.6% and 34.6% respectively due to high oil prices and the discontinuation of electricity discounts.

The risk of stagflation is rising given the strength of inflationary pressures brought about by supply chain bottlenecks and the economic recovery being threatened by the resurgence of Covid infections. I believe that a lot of people were caught off-guard by the width and depth of the supply chain disruptions brought about by the movement restrictions which is powering inflation.  

The World Bank expects Malaysia’s GDP to grow by 5.8% in 2022 on the back of an acceleration in private consumption. This is better than its expected global growth rate of 4.3% in 2022.

However, the World Bank noted that the Malaysia faces limited fiscal space going forward due to declining revenue while rigid operating expenditures (emoluments, retirement charges and debt service payments) remains high and is expected to take up to two thirds of the total revenue generated by the government next year hindering discretionary spending.

The Covid pandemic has also exacerbated existing challenges faced by the lower income households as these households had virtually exhausted their personal savings and had to reduce their spending and consumption to cope with the financial challenges brought about by the effects of the pandemic despite receiving cash assistance from the government as they also bore the brunt of the job & income losses during the pandemic.

The income mobility of the poor and vulnerable households particularly those in the B40 have also been compromised by the pandemic as they lack the resources to effectively upskill themselves in a short space of time. In addition, they also struggle to support their children who were forced to undergo home learning due to the shutdown of schools.

The government has to find ways to address these issues to ensure that the B40 segment is not left lagging behind the rest of country as the economy recovers in the coming years in order to arrest the socio-economic inequality gap.

Retail Group Malaysia (RGM) expects retail sales to grow by 18.3% y-o-y in 4Q21 as shopping behavior and patterns gradually return back to the pre-pandemic levels following the easing of movement control restrictions.

RGM is hopeful that a strong 4Q21 will help the industry post a marginal sales growth improvement of +0.5% y-o-y for 2021 to RM90.4 billion as compared to a -16.3% contraction in sales for 2020, which was the worst performance in 22 years.  

However, stiff challenges remain as the overall economy has only started its recovery while disposable income are still lower than pre-pandemic levels. As such, RGM forecasts that Malaysian retail sales will only return to pre-Covid levels in 2024.  

Goldman Sachs downgraded its 2022 US GDP growth by 0.4% to 3.8% due to the economic downside risks caused by the Covid Omicron variant which has since spread to one third of the US states. 

CURRENCY

The Ringgit rebounded back against the US Dollar during the week at RM4.1930 / USD1.00.

The US Dollar lost ground against most currencies as risk appetite returns to the market following news that the Omicron variant may not be not as virulent as the Delta variant despite being very transmissible.   

Given the latest positive development for the local currency, I expect the Ringgit to trade in a higher range of between RM4.18 to RM4.23in the coming week.   – DagangNews.com

Manokaran Mottain has been an economist with a number of financial institutions is now managing his own firm, Rising Success Consultancy Sdn Bhd