Malaysia’s stock market rise points to a bubble

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By Zurairi AR

KUALA LUMPUR, May 29 — Malaysia’s stock market is at risk of becoming a bubble, as it goes through an unsustainable growth spurt fuelled by a global thirst for yield, said a report by international analysts the Centre for Economics and Business Research (Cebr) today.

Together with neighbours Thailand and Singapore, Malaysia’s debt-to-income ratio has reached between 120 to 130 per cent of its gross domestic product (GDP), a trend which has continued since 2011 after global outlook towards the region turned positive.

“Stagnation in industrialised nations means investors are turning to emerging economies in search of higher yield. ASEAN stock markets have ridden this wave of capital, sending stock prices skywards.

“But the growth rates we are seeing in some countries ... are not sustainable, and could hint of an emerging bubble,” said Cebr’s Head of Macroeconomics, Charles Davis in the quarterly “Economic Insight: South East Asia” report here.

According to the report commissioned by UK-based Institute of Chartered Accountants in England and Wales (ICAEW), Cebr warned that a strong increase in credit often results in inefficient investment, coming from the hope of a future that might turn out less rosy than previously expected.

Cebr joined a chorus of growing fears that Malaysia may be swallowed up by an economic bubble now enveloping ASEAN, even as the countries bask in the growth arising from “hot” money flowing in from developed economies.

Kuala Lumpur witnessed a net foreign inflow of US$63.45 million (RM192.5 million) last month, extending the year-to-date net offshore inflow to US$3.6 billion.

“If this growth continues, these economies will run into increasing signs of overheating or bubble characteristics and bust risks later on,” said a report in April by Robert Prior-Wandesforde, Head of India and Southeast Asia Economics for Credit Suisse.

Despite that, Cebr expected a healthy growth outlook for Malaysia provided the projected positive growth story remains, and urged careful judgment to ensure the credit growth and capital inflows are used for laying the foundation for the future instead of fuelling a bubble.

“For the moment, debt levels are around half of what they were at the peak of the Asian crisis. This is fine for now but would be a cause of concern if credit growth continues to outpace nominal GDP growth at the same rates we see today,” said the regional director of ICAEW South East Asia, Mark Billington.

Continuing its gloomy outlook for Malaysia, Cebr predicted a 4.4 per cent GDP growth for Malaysia in 2013, a low rate pressured by a rise in tax.

Malaysia’s GDP growth is expected to slow even more in the next few years to 4.2 per cent in 2014, and 4.1 per cent in 2015, said the report.

Last year, Prof Douglas McWilliams, Chief Executive of Cebr, had come up with an even gloomier 2013 outlook for Malaysia, predicting a growth rate of only 3.8 per cent. 

Earlier this month, Malaysia reported a gross domestic product (GDP) growth of 4.1 per cent in the first quarter compared with the same period a year ago. It was the slowest pace of growth since the third quarter of 2009, and lower than the 5.5 per cent rate expected by economists.

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