The Ministry of Finance said it has no intention to use debt monetisation or the method of selling government bonds to Bank Negara Malaysia (BNM) directly as a financing strategy. Nevertheless, BNM has mop up more government bonds, from 1% of total government bond issuance to over 6%.
Banks take short-term deposits and lend on longer-term at higher interest rates. Any substantial withdrawal by depositors will put a stress on banks. As such, any sound bank will collapse under a bank run, if there is no support from the central bank. Any central bank will want to avoid a systematic risk from bank runs.
Can the Water Rabbit Emerge Unscathed from the Recession Hole?
As predicted, the 2022 Water Tiger year was filled with unforeseen changes and surprising developments ranging from the outbreak of the Covid-19 Omicron variant, Russia’s invasion of Ukraine creating wreak havoc to the commodity markets with sky high prices that led to inflation concerns, Fed Funds rates raised as high as 75bps sparking concerns of US recession risks and China’s zero-Covid policy with strict lockdowns that exacerbated supply chain woes. Consequently, most regional equity markets ended the year in the negative territory.
Based on Chinese horoscope, 2023 is the year of Water Rabbit and is predicted to be a year of hope. Hence, will the Water Rabbit bring us what we lacked in 2022, which is peace and success, as we navigate through the looming global recession? Some of the pertinent questions in the mind of investors are shown below.
Many blue chips across most exchanges saw their share prices fallen sharply over the past one year. Recent market recovery resulted in sharp percentage recovery of some share prices but they are still far away from previous high. When the dust settles, these quality shares will reward investors with strong capital gain eventually.
US Administering Financial Chemotherapy to Fight Inflation
Inflation is an economic disease and it is affecting every facet of the American life. To tame the current raging inflation, the US has administered its usual financial chemotherapy i.e. to raise interest rate in order to slow down demand but in the process causing a general weakness to the economy. The present aggressive hike in interest rates will eventually bring the US economy to its knee and in the process even cause a recession.
Following the aggressive hike in US interest rates, currency traders have been selling non-US currencies intensively, especially those that are slow in increasing interest rates. In 2017, the USD subsequently dipped for a year even when the Fed was still raising the fed funds rates.. Will USD retreat while the Fed continues its rates hike until next year to tame the inflation?
We are facing stock market warfare every day and fighting the bull and bear at every level. The war between the bull and bear in the stock market continues as they digest various economic information, corporate news and political development. One thing for sure, after a bear, there comes a bull
Investors Rush to Buy Gold on Dip, What about Shares?
Investors tend to rush in to buy gold whenever the price fall. Investors seem to be rational when making decision on buying gold. The same does not seem to happen to share investment. When the market falls, there are opportunities for long term investors with holding power to pick up quality shares that are sold down under the pressure of weak market sentiment.
The rate hike in the US resulted in stronger USD and weaker ringgit, which has depreciated by 4.6% against the USD at end-Apr 2022. The higher US Treasury yield has resulted in lower yield spread vis-à-vis Malaysian bond. As a result, foreign funds have started to exit our bond market lately; however, they seem to remain comfortable with our equities market
Instead of using the traditional weapons, US has revealed a new weapon to checkmate an opponent by excluding a few Russian banks from using the SWIFT for trade settlements. To protect themselves from the same fate of Russia, other countries may have to reduce their holdings in USD in their reserves and use more non-USD currencies to settle trades. While USD will remain as the dominant global currency for many years to come, its position will continue to deteriorate.
The investment strategy on whether to buy or hold or reduce will depend on whether the Russian will stop the invasion. It is extremely difficult to determine whether Russia will cease its invasion, which essentially depends on the assurance that Ukraine will not join NATO.
The impacts of previous wars to the stock market had been short-lived. As Ukraine is not a member of NATO, the Russia-Ukraine war is likely to be an isolated war that will not involve US and also NATO directly. Without such fear, the war will only cause commodity prices esp crude oil, natural gas, wheat and corn to spike. We recommend long term investors to take advantage of the market sell down to accumulate on good fundamental stocks.
Our PMART Discretionary Portfolio ended 2021 with slightly higher losses than FBMKLCI and that of PMART Advisory mandates due to losses related to Serba-related stocks. As for 2022, we are cautiously optimistic that the returns of foreign funds which will help boost the domestic market sentiment will be able to weather the uncertainties of US interest rate hikes.
While we are getting ready to bid farewell to the year 2021 but we cannot say goodbye to Covid-19 yet especially with the emergence of the highly infectious new Omicron variant in November. We have been expecting life and businesses to revert to new normal soon with more economies opening up.