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Monday, 22 January 2018 | MYT 12:00 AM

Caution on ringgit and debt-funded projects as 'fingers of instability' creep in

THE collapse of giant British construction firm Carillion may not have a direct impact on markets but it is a sign that risks are emerging from debt-funded projects.

“Unprecedented levels of optimism does not mean risks are absent. ‘Fingers of instability’ are creeping into the system. Such optimism is engendered by actions like cutting rates or ceasing rate hikes especially when equity markets are in trouble.

“In bond markets, we also see ‘fingers of instability.’ In spite of ultra low rates, more companies went bankrupt last month,” said Pong Teng Siew, head of research, Inter-Pacific Securities.

Chapter 11 bankruptcies rose 107% last month, according to the American Bankruptcy Institute.

“Rising levels of debts will take its toll on the economy even if rates are low. The collapse at Carillion can be blamed on aggressively priced bids for private finance initiative (PFI) projects funded by debt,” said Pong. Carillon is a big contractor for PFI projects. The collapse involves the loss of 43,000 jobs, said The Guardian, and the threat of contagion is likened to a re-run of the banking crisis with 30,000 small firms owed money.

“(The collapse) will likely have a localised impact,” said Lee Heng Guie, executive director, Socio Economic Research Centre.

“It has very little links to Malaysia but shows how tough Brexit is going to be for Britain,” said Hor Kwok Wai, chief operating officer, global markets, Hong Leong Bank.

“Bursa may face healthy profit taking after a sharp run-up since Christmas. Bursa being a laggard, would be more appealing, judging from upbeat global macro data and positive equity outlook, along with past regional market performance,” said Danny Wong, CEO, Areca Capital.

“Stronger economic data and improving corporate earnings this years form the basis for our expectation for a 10% reurn on Malaysian equities,” said Thomas Yong, CEO, Fortress Capital.

Most investors are now pretty fully invested and that means they will want to get out if the markets start to correct – exacerbating the downdraft, Joachim Fels, a global economic adviser at Pacific Investment Management Co, was quoted as saying.

“China’s resilient headline growth means that the authorities have more leeway in their economic rebalancing efforts.

“This can spark speculation on possible monetary measures and send jitters to the markets which will also be affected by any upside surprise in inflation in the United States, causing a faster-than-expected rate hike,” said Nor Zahidi Alias, chief economist, Malaysian Rating Corp.

Is a late stage melt-up on the way?

“The melt-up involves the stage of being in a hurry to make money, knowing the window is closing. In the bigger picture, this (window may be closing) perhaps not later than early 2019,” said Pong.

Signs include an aggressive rotation into procyclical investments such as equities and emerging markets currencies, and out of defensive sectors such as telcos and utilities.

“Energy and commodities as well as oil and gas, and even soft agricultural commodities will likely join in. That will likely signal the end is near, with about a year to spare, at the most, for the party,” added Pong.

Be careful of the strong ringgit

“Do not get over-confident by this episode of ringgit strengthening. An unreasonably strong ringgit for an unduly protracted period is likely a sign of danger. The funds may be setting up for a big fall later,” said Pong.

China’s economic growth last year rose to 6.9% from 6.7% in 2016, marking its first year of acceleration since 2010.

Gross domestic product increased 6.8% in the fourth quarter from a year earlier, versus 6.7% in a Bloomberg survey.

“It was an upside surprise to the market. While it appears to be good news, it will likely be hard to keep up with that rate of growth,” said Wong. The Beijing authorities will continue to adopt restrictive monetary policies and financial stability measures to rein in credit expansion and control debt. This is to ensure that the economy is anchored on a sustainable growth path,” said Lee.

Retail sales in China are on track to hit US$5.8 trillion, said The Washington Post, quoting Mizuho.

It is expected to equal or surpass sales in the United States for the first time, added the report. “This underlies steadying economic restructuring to focus on domestic consumption and services as the drivers of growth.

“Sustained Chinese consumer spending opens up business opportunities and spurs demand for consumer products.

“Chinese consumers’ craze for the Musang King durian, coffee, birds nest and halal products have boosted exports and the growth of e-commerce,” said Lee.

Columnist Yap Leng Kuen views that debt is not a small matter that should be aggressively used.