Traders predict a slower quarter ahead

Investors will be watching out for Malaysia’s second-quarter GDP out later today.

Investors are predicting a slower quarter after activities slowed despite the ruling party winning the election this year. Like its peers, exports’ momentum is expected to be weak due to slowing commodity prices.

Other factors hampering growth are a slowdown in household spending and investments. The Malaysian equities and bond markets have been spared from the recent carnage. The country is running a surplus in the current account, the underlying theme of slowing global demand will be a headwind.

India and Indonesia have been most affected by the recent market rout. Although the Fed’s possible liquidity tightening has been blamed, the underlying issue for these countries is a bleak outlook on economic growth for the rest of the year.

The 10-year government bonds for both are at 5-year highs. The currencies are the two worst performers in Asia for the past month; spot rupee lost 6% and rupiah 5.5%. Investors have been heavy sellers in the equity markets where the Jakarta Composite declined 20% from its high since 21 May, with India’s Sensex faring slightly better, still down 10% since then.

Though the two countries are different, they do share vulnerability in their ballooning current account deficits. India’s current account deficit was at $18.1 billion for Q1 this year, from $32.63 billion in December 2012. The country is grappling with changes, from a new governor for the Reserve Bank of India next month to policy changes to tighten cash outflows by curbing gold imports.

Government efforts

The RBI raised two interest rates on 15 July in an effort to contain the rupee’s decline. Government efforts so far have fallen short. Investors have interpreted these policies as panic and short-term fixes. There is a need for longer-term strategy, such as pro-business reforms, spending on capital investments and social programs.

The country is posting its slowest growth, with GDP for Q1 in 2013 at 4.8% and likely to contract further due to weak consumption, capital investment and declining government spending.

The government has been actively trying to counter slowing growth. In a speech on the 15 August, the Prime Minister - Manmohan Singh, who faces election in May next year - pledged to remove hurdles on stalled projects, ease foreign ownership rules and start work on infrastructure projects such as ports and rails. International investors reacted by selling a net $105 million of Indian shares on 19 August, data from the regulator shows.

Indonesia

Indonesia has its own problems; economic growth has been slowing down since 2012 and in Q2 of 2013, GDP slowed to 5.81%. Exports shrank 4.5% in June for a fifteenth consecutive month, and current account deficit surprised investors at $9.8 billion in Q2 of 2013. Bank Indonesia held interest rates at 6.5% in August after hiking the BI rate by 50 bps and the deposit facility rate by 50 bps in July.

PT Jamsostek, Indonesia’s biggest pension fund, is trying to shore up confidence by announcing its plans to purchase Indonesian stocks after the Jakarta index dropped 11% in the past four days of trading. Exports - the engine of growth in the past - have declined to close to the 2009 levels. Economic growth is hampered by rising inflation, slowing household consumption and a lack of infrastructure spending.

The question we often get asked is where is the bottom? In the Jakarta composite, the 4000 level is the immediate support line with the resistance at 4250. We should expect the index to trade around this band if the support line holds. India’s Sensex is trading close to the immediate support line at 17,800 and resistance at 18,500. Given the velocity of the drop in both indices, we don’t expect a quick recovery ahead.

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