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6 Years On Last Economic Crisis, When’s The Next Coming?
Perspective | 12 December 2014
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By: Shane Goh
Articles (99) Profile

According to the National Bureau of Economic Research, the US has witnessed 11 business cycles from 1945 to 2009, with the average length of a cycle lasting about 69 months, or about six years. During this period, the average expansion lasted about 58 months, or about five years, while the average contraction took place over 11 months.

The last major global economic crisis was the US subprime crisis in 2008. This had a profound impact on the stock market. On 6 March 2009, the Dow Jones Industrial Average hit a low of 6,469.95, crashing from a record high of 14,198.10 established back on 11 October 2007.

This phenomenon can also be seen in our local market. On 10 March 2009, the Straits Times Index hit a low of 1,455.47. The previous time the index was seen at this level was back in July 2003. That’s slightly about six years apart. Come March 2015, we would be hitting the six-year mark since March 2009.

If the market indeed takes a nosedive, how could an investor position his portfolio sector allocation to shield himself from an economic contraction?

Defensive Sector

In an economic downturn, consumers tend to hold back on discretionary spending, choosing to devote a larger portion their income towards savings and necessities instead.

This implies that companies producing consumer essentials such as food and toiletries would not be as affected by the change in consumer spending, compared to non-discretionary such as cars and hotels.

Apart from a global observation, we may wish to consider country-specific events that may impact each country’s consumer sector. In this article, we will take a closer look at Malaysia and Hong Kong.

Subsidies Slash, Impending GST

In July 2010, Malaysia’s government initiated a subsidy reduction for fuel, cooking gas and sugar. The move was aimed at narrowing its fiscal deficit, which stood at 3.9 percent of its gross domestic product (GDP) in 2013, with hopes for a balanced budget by 2020.

In October 2013, the government abolished its sugar subsidy entirely. On 1 December, the tumble in oil prices since June, prompted the government to do away with its fuel subsidies.

While subsidies are being reigned in, the government has also planned to implement a 6 percent goods and services tax in April 2015, to replace its existing sales and service tax regime. Combined, this implies a sombre outlook for its residents as the cost of necessities such as fuel and sugar goes up while tax increases means more expensive purchases.

However, not all is gloomy. According to data from The World Bank, Malaysia’s GDP per capita hit an all-time high of US$10,513.71 in 2013. In the same year, its population reached a record of 29.7 million. As the sale of consumer goods is closely tied with purchasing power, a rise in both spending means and population bodes well for companies producing them.

Occupy Central Effects Linger

Over in Hong Kong, a different set of challenges exist. On 28 September, a civil disobedience movement, Occupy Central, started in the country. The spark was the Beijing, China, and Hong Kong government unwillingness to implement universal suffrage for the latter’s chief executive election in 2017 and the Legislative Council elections in 2020.

The move resulted in a slowdown of its economy and led to the halting of certain operations such as several Hong Kong branches of DBS Group Holdings and Oversea-Chinese Banking Corporation in the protest areas. While protestors appear to have left the scene, an agreeable solution between them and the government does not seem to have been met.

In the financial markets, the Shanghai-Hong Kong Stock Connect went live on 17 November. This allows global investors to purchase shares listed on the Shanghai Stock Exchange through its Hong Kong counterpart. While this may not impact consumer expenditure in Hong Kong, it may drive liquidity away from the Hong Kong shares as investors opt for Shanghai-listed shares instead.

Up north, China 3Q14 GDP growth came in at 7.3 percent, its slowest pace since 1Q09. According to The World Bank, China’s official 2014 GDP growth target of 7.5 percent would be the weakest rate since 1991. On top of it, China is presently undergoing an anti-corruption crackdown. The move would deter high-spending Chinese from flaunting their wealth and reign in luxury spending.

Together, both factors point to a potential reduction business opportunities and consumer expenditure from its neighbour. This may result in a drag on Hong Kong’s GDP growth.

SI Research Takeaway

During a global economic slowdown and in the face of a dim outlook, stock selection becomes imperative. Despite potential headwinds in the local market, companies listed in both exchanges that have overseas business exposure could fare better than others dependent on the domestic market.

Over the next few days, we will present four stocks listed on Bursa Malaysia and the Hong Kong Stock Exchange worth a second look. Stay tuned.

Currently pursuing his Chartered Financial Analyst qualification, Shane provides coverage on the property, consumer and environmental sectors at Shares Investment.

Please click here for more information about this author.

DBS Group Hldgs  24.780 -0.16 -0.64%   
Business: [FY18 Total Income] Institutional banking (43.7%), consumer banking/wealth management (42.9%), treasury markets and others (13.4%).

Insight: Apr-19, 1Q19 net profit rose 9% to a record $1.7b.... Read More
Oversea-Chinese Banking Corp  10.740 -0.11 -1.01%   
Business: [FY18 Turnover] Global corporate/investment banking (35%), global consumer/private banking (34.8%), OCBC Wing Hang (11.5%), insurance (11%), global treasury & mkts (7.7%).

Insight: May-19, 1Q19 total income rose 14.7% driven by str... Read More

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