Stress test for corporate Malaysia

IT’S been a roller coaster ride for investors in 2018 – contributing to weakening confidence. The last three months of the year have been especially ruthless and stocks have seen a meltdown.

Dow Jones, the key benchmark in the United States and the S&P 500, which is an indicator of the broader market, were on the precipice of the bear market on Christmas eve after having declined 20% from their respective peaks.

Just when investors were expecting the worst, stocks bounced back from the edge of the bear market.

The jump of 1,086 points recorded by the Dow on Wednesday was its best single-day session to date. Meanwhile, the S&P 500 also rose by almost 5%.

Volatility has been a familiar feature this year.

Fear has ruled markets and the vehemence of a challenging 2019 is increasing.

Three main issues have been weighing on global markets in 2018: the trade war between China and the United States, the pace of US interest rate hikes, and the flatenning yield curve.

Volatile oil price continues to wreak havoc on the economy. Initially going on an upward trajectory and touching a high of US$86.29 on Oct 3, it spiralled down to US$54.38 as of Dec 27. Brexit also continued to weigh on the sentiments of markets.

Is this a bear market or a correction?

The fundamentals and facts of the world economy do not seem to suggest that the bearish sentiments are overwhelming.

First of all, the yield curve is flattening but the spread between the US two-year and 10-year Treasury bills are about 20 basis points.

The Conference Board’s Leading Economic Indexes (LEI) for the United States and eurozone remain in long uptrends.

In the third quarter of 2018, the percentage of S&P 500 companies beating earnings came in at 70.2%.

Meanwhile, adjusted for inflation, global third-quarter gross domestic product rose 2.4% year-on-year. JP Morgan’s Global Composite PMI hit 53.2 in November, implying growth, and more of it ahead.

The LEI or indicators that change before economies show any signs of change are exceedingly high and rising led by the United States and eurozone.

Most countries’ Purchasing Managers’ Indexes show rising new orders – which is good news as today’s orders are tomorrow’s production.

China is slowing down – growing by 6.5% in the third quarter – the slowest since the global financial crisis in 2008. Although slowing down, it is still a growing economy.

More importantly, the Chinese authorities are reforming the economy and no longer tolerate low quality credit expansion to fund investments.

As for corporate Malaysia, based on a research done by a private firm covering 331 companies whose value encompasses 95% of the market capitalisation of Bursa Malaysia, companies generally took on more debts.

After excluding 22 financial institutions due to the difficulty in assessing their liquidity position, the research narrowed down to 309 companies.

Out of the 309 companies, some 188 are in net debt position carrying a total of RM286.33bil as of end-September 2018.

Some 121 companies are in net cash position with a total of RM42.81bil.

Here are the companies, the corporate debt levels and the changes in their cash and debt positions in the last one year (see chart).

 

Click on image for larger view