Equity Market Review, Outlook & Strategy

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•	PacificMas Berhad
•	The Pacific Insurance Berhad
•	Pac Lease Sdn Bhd
•	PacificMas Asset Management Sdn Bhd
•	Malaysian Trustees Berhad

– 31 October 2008

A global rout in stock markets, driven by among others, risk aversion, credit market stress, deteriorating growth outlook and redemption-driven selling, led to deep losses in the Malaysian equity market, with the KLCI plunging to as low as 801.27. However, a bounce near month-end led the benchmark to trim its loss to 15.22% for the month. The market carnage also left the FBM EMAS Index, the FBM Second Board Index and the FBM Syariah Index with losses of 16.10%, 13.86% and 15.34% respectively. In comparison, measured on the MSCI World Index, global equities lost one-fifth of their value in October.

Despite an unprecedented coordinated round of interest rate cuts from global central banks to ease the economic effects of the financial crisis plus other aggressive intervention in the financial system by the world’s respective governments, investors feared that the severity of the financial crisis in the west would push the global economy into a recession or even depression. Plunging key macroeconomic indicators in the US and the rest of the world provided evidence that a painful recession was likely underway and overshadowed efforts to rein in the global credit crisis. Along with the free fall in equity markets was the weakening in commodity prices (the Reuters/Jefferies CRB Index of 19 raw materials plunged 22%) and the dramatic plunge in several currencies.

Malaysia’s economic newsflow during the month was lacklustre. The country’s industrial production slowed down for the fourth month in a row in August to 0.9% year-on-year, while export growth slowed down sharply to 10.6% year-on-year from 25.3% year-on-year in July due to the drop in commodity prices. Think tank Malaysian Institute of Economic Research lowered 2009 Malaysian GDP growth forecast to 3.4% (versus the official target then of 5.4%), expecting the economy to take a hit from the global downturn. Malaysia’s leading index in August contracted 0.4%, the first contraction since January 2005. Meanwhile, inflation in September moderated slightly to 8.2% from 8.5% in August. With the sharp decline in crude oil prices, the Malaysian government announced two cuts of 15 sen each in pump prices in November.

Post October and the thawing of credit markets, stock market pressures have taken a breather. However, the general view is that the unwinding of western collateralized debt obligations (CDOs) and credit default swaps (CDS) will require plenty of time and capital and it is not clear to what extent the markets have discounted this. Adjustments to accounting policies may help. On the positive side, some of the political risk premium for Malaysia should be reduced as there is now clarity that the current government will remain in power with an incoming new Prime Minister. With the unveiling of a fresh RM7 billion stimulus package in Malaysia in the first week of October, there may be some cushion from the external headwinds.

Fixed Income

Heavy stress in the money markets and financing channels prompted central banks across the globe to flood the financial system with liquidity. Short-term Treasuries rose as emerging market assets weakened and global recession concerns fuelled safety demand in government debt. The Treasury curve steepened as the Federal Reserve delivered an expected 50 basis point cut in its target Federal Funds rate during the scheduled Federal Open Market Committee (FOMC) meeting on 28 October, in addition to an 8 October inter-meeting 50 basis points cut in a coordinated move with the European Central Bank and counterparts in London, Sweden and Canada. Yield on the 2-year note dropped 27 basis points to 1.56%.

Towards the end of the month, long-term Treasuries posted moderate losses on concerns that the US will issue more securities to pay for the rescue of the financial system. Yields on the 10-year note have risen 23 basis points over the month to 3.966%. Given the prospect of increased amounts of government paper being issued, medium and long-term US Treasuries will have little potential to rally. US curve will likely steepen further with short-term rates being held by further rate cuts by the Federal Reserve.

The domestic sovereign bond market strengthened during the first half of the month on risk aversion trades amidst the ongoing credit market turmoil and expectations of slowing economic growth. Receding inflationary outlook premised on the sharp correction in global crude oil and commodity prices also boosted sentiment. The MGS curve flattened with investors favouring longer dated maturities. Activities along the credit market were thin despite strong interest in the sovereign market. Sentiment remains cautious given the lack of investment alternatives as funding activities remain lacklustre. On 24 October, Bank Negara held the overnight policy rate (OPR) steady at 3.50% with greater focus towards avoiding a sharp global economic downturn.

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