Foreign funds comeback, rising interests in Malaysian properties and equities

Foreign interest in Malaysian real estate picks up: Knight Frank

KUALA LUMPUR: Foreign investors' interest in Malaysian real estate, particularly commercial property, is picking up due to the weakened ringgit, said Knight Frank Malaysia Sdn Bhd.

"What we are noticing is that given the ringgit is currently at one of its lowest (levels) in the last many years, interest in Malaysian real estate is actually now coming back because people feel there is upside not only in terms of capital value appreciation but also the fact that the ringgit will move back possibly to better levels. We are certainly seeing this," its managing director Sarkunan Subramaniam told reporters at a briefing on Knight Frank's The Wealth Report 2016 yesterday.

Executive director James Buckley said it has been seeing interest from the Middle East and the US who are typically opportunistic investors attracted by the currency play here which, combined with the slightly subdued property market fundamentals, makes it a good time for them to enter the market.

"I've got two significant groups coming this week ... one from the US, one from Japan. It's a regular basis now and has been picking up from last year. A lot of them are doing initial trips to understand the market a bit better. They are really focused on commercial investments so the office market, retail market and some are interested in hospitality assets as well," he said.

Buckley said in the past, foreign investors investing in Malaysia were typically from Japan and the growing interest from the US is surprising as the Malaysian market is small compared with the US market.

He said these investors are attracted by the currency and the slight oversupply of office space in Kuala Lumpur.

"It is a good time for them to negotiate some good deals here," Buckley said, adding that most of the foreign interest in Malaysia come from Korea, Japan, Singapore and the Middle East.

Meanwhile, the trend among local property investors is also changing, with interest moving from office space and agricultural land to office, retail and hospitality assets. However, residential property remains the core real estate investment for Malaysians.

"In the global context, interest in commercial property is growing quite strongly. What came out of The Wealth Report is that 47% of UHNWIs (ultra high net worth individuals) are expecting to increase their allocation in commercial property. In the Malaysian perspective, we do see a gradual rise in the interest in commercial property. Particular popular choices for Malaysians are office and retail investments, and they are looking to increase their exposure to these assets over the next 10 years," said Buckley.

He said there is a misconception that investing in commercial property is more complicated while some feel they lack experience investing in this sector but interest is picking up as investors are becoming more familiar with the market and understand better the benefits of investing in commercial property.

The report showed that Malaysian high net worth individuals (65% of survey respondents) have increased their asset allocation to residential property.

Moving forward, 65% of Malaysian survey respondents said they will increase asset allocation to residential property in the next 10 years.

In terms of property purchases this year, 39% of Malaysian UHNWIs said they are considering residential purchases. This is more than 29% of global UHNWIs who intend to buy residential property this year.

On average, Malaysian UHNWIs own more properties (4.7) compared with the global and regional average of 3.7 and 3.92 respectively. As for overseas investments, the top three locations for Malaysian investors are Australia (Melbourne), the UK (London) and Singapore.

Bulls making a comeback

Foreign funds are putting money in emerging markets

HUMAN beings have a natural tendency to fear heights – it’s a natural survival instinct which worked well in the wilderness and in the outback, but one which severely plays against us when it comes to the stock market.

Seven years ago, back in early 2009, these were some of the top financial headlines in the US:

> Georgo Soros says US banks ‘basically insolvent’

No one knew it then, but the Dow Jones was about to embark on a seven-year bull run and would gain some 92% over that period. Riding along was the FBM KLCI, which gained 85% over the same period.

For sure the ride has been bumpy and riddled with sharp corrections. But for investors who held on to their stocks, they would have been rewarded with handsome returns.

For any investor invested in the market – volatility will always be there. But as long as they are able to endure the frailty and fluctuations of the market, the long-term rewards historically outweigh the short-term fickleness.

We have heard it many times before – the best time to own stocks is when sentiment is at its worst,

This was especially apparent in early 2009 when the US economy was on the brink of a banking collapse, In those dark days, there were more forecasts of Black Mondays than predictions of light at the end of the tunnel.

Eng: ‘The market has had a good run since January.’

The stock market, as always, had a mind of its own. Despite the proclaimation of dooms and the fall of many American banks, the Dow was heading almost on a straight upward trajectory by mid-March 2009. 

Sir John Templeton said: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

That was true seven years ago, 50 years ago, and definitely just as true today.

Logically speaking, what comes down must go up.

Earnings can still be nasty, but doesn’t the market always behave a year forward. At the heart of it all, the market is made up of buyers and sellers. All it takes are a few buyers during a down period to sniff out an opportunity, and suddenly, the market is edging upwards.

It’s the same story with oil prices. Do not expect the coast to be completely clear – for example no more excess inventories, oil demand significantly outpacing supply or the Organisation of the Petroleum Exporting Countries (Opec) deciding to cut production by 50% – before we see oil prices moving up.

By the time these signs are crystal clear, oil prices have made new highs months ago.

In any case, last week the International Energy Agency (IEA) said that oil prices had bottomed out due to US and other output cuts outside the Middle East-dominated Opec.

The US rig count fell for a 12th straight week last week to a total of 386, its lowest since December 2009 as drillers continue to slash capital expenditure.

Zulkifli: ‘These are still early days of a recovery. People are still sceptical ...’

The problem now is that after a seven-year run, investors are getting nervous. Investors have mostly been in a flux wondering where the market is heading. Most investors are waiting for the crash to come. They talk about a sluggish economic outlook, falling earnings, recessions in commodity-heavy nations, slowing growth in China, negative interest rates, the end of quantitative easing in the US, the UK (potential Brexit) and flatter yield curves. 

Has the market stalled and lost some of its stamina? With the expectation only of mediocre growth and low yields, is it time to sell stocks?

Behind the scenes, some under-appreciated indicators are starting to show some light.

First of all, the ringgit has been strengthening – a reflection of foreign money coming back to Malaysia. It strengthened 0.6% this week to RM4.09 against the greenback.

Last week, foreigners bought listed equities amounting to RM1.04bil on Bursa Malaysia, higher than the RM972.2mil acquired in the preceding week. To date, there are some 12 consecutive weeks of total net inflows and brings cumulative year-to-date foreign purchases to RM1.6bil.

For the entire 2015, there was a net outflow of RM19.5bil.

Meanwhile the FBM KLCI closed at 1,703.19 on Thursday, which is also its six-month month high. The seven-month high is 1,744.19 recorded on Aug 3, 2015.

From a charting perspective, a recovery in the FBM KLCI appears to be playing out.

“We reiterate our view that KLCI must close above 1700 levels convincingly to sustain the ongoing rally from 1600, with key upside target at 1710 (March 7 high), 1727 (Oct 19 high) and 1740 (200-day simple moving average) levels. Failure to close above 1700 will see the index continue its short-term congested range-bound consolidation within the 1660-1700 territory,” says Hong Leong analyst Nick Foo.

Etiqa Insurance & Takaful head of research Chris Eng, on the other hand, feels that the market is toppish for now.

“The market has had a good run since January. It may have a few more legs to run, but come April, it will be earnings results in the US, and in May, it will be earnings result in Malaysia. We aren’t expecting very positive earnings coming out, so market may start falling again by April,” says Eng.


From a trading perspective, he would ask clients to sell into strength.

On a fundamental perspective, however, he isn’t expecting a recession, well at least not this year. He would still advice investors to stay invested in equities.

“We are expecting some weakness in the market come middle of the year. That would be a better time to buy. We would identify that weakness and look for opportunities then,” says Eng.

MIDF Research has been recommending its clients to start buying since the start of the fourth quarter last year.

“These are still early days of a recovery. People are still sceptical, especially retail investors. But we have been tracking the money flows, and foreigners have been net buyers every single day of the 14 trading days so far this month, which is a phenomenon not seen in more than two years” said Zulkifli Hamzah, head of MIDF Research.

According to Zulkifli, the Malaysian equity market is benefiting from a tide of global liquidity flowing into Asia. Some of the money is actually global funds in China, being reallocated to other Asian markets as the outlook in Asia’s biggest economy is challenging.

“In the bond market, Malaysia started to look attractive to the foreigners as early as September last year. The low global interest rate environment, with negative rates in some countries, has made local yields very attractive indeed. That is reinforced by the depressed Ringgit,” said Zulkifli.

“Overall, we are positive on the market. Sceptism of the market has been partly due to the relatively restrained climb in the index. But this has been due to selling by local funds, which are understandably taking the opportunity of the market’s upward march to realize their profits. We also do not expect to see such a steep incline in the indices because of rotational forces at work,”

“Global investors are not going to come in and buy blindly across the board although the Ringgit is seen as undervalued. They will be selective and buy only those stocks that they see value. We believe the current uptrend has legs. However, there are potential potholes which may cause temporary retracement, at which point it would be opportune to enter the market,” said Zulkifli.

He added that the changing of guard in Bank Negara and the Sarawak state election would be closely watched by foreigners.

No rate hike is good for Malaysia

On Wednesday, Federal Reserve officials lowered their view of the economy and said they likely won’t raise interest rates as swiftly as they had previously anticipated as there are lingering risks posed by soft global growth and financial-market volatility.

Policy makers left short-term interest rates steady and said they would raise their benchmark rate just twice this year, after an initial increase in December 2015, down from the four they previously predicted.

Last week European Central Bank (ECB) chief Mario Draghi announced a much bigger and wider-ranging stimulus package than anyone had expected

He increased his purchases of financial assets by a hefty 20 billion euros per month (from 60 billion-80 billion euros), pushed interest rates lower into negative territory (by 10 basis points), improved financing for the banks and announced his intention to buy investment grade corporate bonds.

In other words, the ECB will pay banks 0.4% to lend. This puts the eurozone in a negative interest-rate situation.

This move inevitably makes Malaysia more attractive.

Recessionary pressures and low interest rates in the US are a boon for emerging markets like Malaysia. This is further helped by economies like Japan and China which are continuing to cut interest rates to kickstart their economies.

With US and eurozone interest rates having stayed in negative territory for so long, and doubts on future rate hikes, investors are getting desperate for yields.

So they come to Malaysia, where the average yield on a 10-year dollar bond is higher by some 140 basis points than a similar US Treasury 10-year note.

Also, after a torrent of bad news, some confidence is returning to Malaysia.

Last month, Fitch Ratings affirmed Malaysia’s long-term foreign and local-currency issuer default ratings (IDRs) at A- and A respectively, with stable outlook.

Malaysia’s senior unsecured local-currency bonds were also affirmed at A while the country ceiling was affirmed at A and the short-term foreign-currency IDR at F2.

The three rating agencies – Moodys, S&P and Fitch Ratings – have given the same credit rating of between A3 and A- with stable outlook for Malaysia.

Bank Negara also announced that Malaysia’s economy grew by 4.5% in the final quarter of last year, which was better than expected. This brings the full-year gross domestic product growth to 5% from 6% in 2014.

The recent stability in the ringgit was also a positive factor for foreign investors, and this has taken away some of the foreign exchange risk of investing here.

The ringgit is the best-performing emerging-market Asian currency over the past three months, having been one of the worst performers last year. Year-to-date, the ringgit has gained 2.05% against the US dollar.

The economy is on a better footing now that the Government has revised its budget based on oil prices between US$30 and US$35, and the country is on track to achieve its targeted budget deficit of 3.1%.

by Tee Lin Say The Star

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Singapore layoffs bulk of high-skilled workers, households feeling the pinch

High-skilled workers make bulk of layoffs last year

Office workers at Raffles Place. TODAY file photo

HIGHER-skilled workers, degree holders and middle-aged workers were the hardest hit by layoffs in Singapore last year, making up more of the pool of resident workers made redundant than workers of other occupational, educational and age groups.

These groups were also less likely than other resident workers to be in employment within six months of being made redundant, Ministry of Manpower (MOM) statistics showed.

Of the Singaporeans and permanent residents who lost their jobs last year, more than seven in 10 (71%) were professionals, ­managers, executives and technicians, up from 66% the year before.

This was disproportionately higher than their 54% share of the resident workforce last year.

Between workers with different educational qualifications, degree holders made up the largest share – 44% – of residents who lost their jobs last year. This was up from 41% in 2014.

One in three of the resident workers made redundant last year was aged 40 to 49, despite this group making up only about one in four of the overall resident workforce.

Less than half of both degree holders and middle-aged workers who were made redundant in the third quarter of the year were back in employment by December.

Some workers could have decided to go for training or stop looking for a job, MOM said in its report.

But another reason could be that older workers already have preferences, such as not wanting to do shift work, said Linda Teo, country manager of human resource firm ManpowerGroup Singapore.

“This means they won’t be at the top of the list when employers sieve through applications.”

Adecco Singapore country manager Femke Hellemons said workers here often move from industry to industry for a comparative advantage, and skilled workers may take more time to find a job that they have the right skills for that also matches their pay expectations.

Losing a job would be a blow for those over 40 years old and with higher skills as they tend to have higher financial obligations such as mortgages and children’s study loans, but at the same time they are more costly to employers, said DBS economist Irvin Seah.

Overall, redundancies rose over the year while the number of vacancies fell, which experts said was because of weak global demand.

“This could be a sign of companies adopting measures to achieve cost efficiencies through outsourcing, offshoring and adoption of technologies in their work processes,” said Foo See Yang, vice-president and country general manager of Kelly Services Singapore.

ManpowerGroup’s Teo said the employment pattern is likely to continue its downward slide, as hiring intentions for the next three months are at their weakest since the third quarter of 2009. — The Straits Times/Asia News Network

Layoffs in S'pore last year highest since 2009 Global crisis

In what could be a sign of worse things to come, more workers lost their jobs last year amid weaker economic conditions, although unemployment remained low.

A total of 15,580 workers were laid off in 2015, the fifth consecutive year of rising redundancies, according to full- year official data released by the Manpower Ministry (MOM) yesterday.

Last year's number climbed 20 per cent from 12,930 in 2014 and was the highest since the 2009 global financial crisis, which saw 23,430 workers laid off.

Job vacancies also fell to 53,700 as of December after accounting for seasonal variation, down 18 per cent from 65,500 a year earlier.

The trend could continue. "Amid the cyclical weakness and as the economy restructures, some consolidation and exit of businesses is expected," MOM said.

Just over half, or 51 per cent, of the Singaporeans and permanent residents (PRs) made redundant from July to September last year were back in employment by the end of the year.

This figure measures the re-entry rates within six months of redundancy based on Central Provident Fund (CPF) records, and was down from 55 per cent three months earlier and 59 per cent at the end of 2014.

Still, the unemployment rate last year remained unchanged for Singaporeans, at 2.9 per cent. The figure including PRs was 2.8 per cent, up from 2.7 per cent in 2014.

There were 2,268,900 Singaporeans and PRs in jobs in Singapore as of the end of last year, just 700 more than there were a year earlier - when local employment had grown by 96,000.

With employment of foreigners also slowing, the total number of workers here stood at 3,656,200 at the end of last year.

For the year ahead, MOM expects redundancies to continue to rise in sectors facing weak external demand and that are undergoing restructuring, while domestic services sectors are likely to continue to need workers.

The Ministry added that it is "closely monitoring the current economic and labour market situation, and is strengthening employment support to help displaced locals re-enter employment".

PMETs made up 71% of those affected as workers found it more difficult to get new jobs

SINGAPORE — The number of workers laid off last year spiked 20.5 per cent compared with 2014, reaching 15,580 — the highest number since the global financial crisis seven years ago, the latest Ministry of Manpower labour market report showed on Tuesday (March 15).

In 2009, the number of redundancies reached more than 23,000. The majority of last year’s lay-offs were in the services sector (55 per cent), where the financial services, wholesale trade and professional services were worst hit. Correspondingly, professionals, managers, executives and technicians (PMETs) made up 71 per cent of those laid off last year, up from 66 per cent in 2014.

The financial services sector — which had been hit by news of job cuts announced by global banks, affecting employees here — shed 1,710 jobs last year, compared to 1,280 in 2014. Over the same period, the number of workers laid off in wholesale trade climbed from 1,490 to 2,150, while job losses for those in professional services — including doctors, lawyers and accountants — rose from 1,520 to 2,290.

Workers who were laid off also found it more difficult to get a new job last year: Based on Central Provident Fund records, half of the residents made redundant in the third quarter of last year managed to secure employment by December, down from 55 per cent in the previous quarter, and 59 per cent in the same period in 2014.

MOM said it expects redundancies to continue to rise in sectors facing weak external demand and those that are undergoing restructuring. Domestic-oriented services sector will continue to need workers, the ministry said. “MOM is closely monitoring the current economic and labour market situation, and is strengthening employment support to help displaced locals re-enter employment,” it added.

(Click to enlarge)

Economists told TODAY that the slower global economic growth and the downturns in manufacturing as well as the oil and gas sectors have had a spillover effect into the services sector.

DBS Bank senior economist Irvin Seah said the slump in oil prices not only affect oil rig builders but the entire supply chain including smaller companies that support the oil and gas sector. The financial services sector would continue to see more job losses compared to other segments as it is going through some consolidation, Mr Seah said. As far as the labour market is concerned, the worst is yet to come as the global economic outlook deteriorates, he cautioned.

CIMB Private Banking economist Song Seng Wun said that while lay-offs may not necessarily increase over the year with some sectors still hiring, the pace of hiring may slow and this could push the unemployment rate up. “I would expect job seekers to take even longer to find a new job in the year head. Businesses may not be laying off more workers but they may not be that in a hurry to hire,” Mr Song said.

Unemployment rate for residents was 2.8 per cent last year, inching up from 2.7 per cent in 2014, while that for citizens remained unchanged at 2.9 per cent.

Mr Seah noted that the foreigners has borne the brunt of the job losses so far. “Companies are unwilling to let go of local workers because of the low foreign worker dependency ratio ceiling,” he said.

On the high proportion of PMETs laid off last year, Members of Parliament (MPs) from the labour movement attributed it to the fact that this group of workers comprise a higher percentage of the total workforce. Still, NTUC assistant secretary-general Patrick Tay, who is also an MP for West Coast GRC, said he was particularly concerned about PMETs above 40 years old, who would have a harder time finding a new job if they are retrenched.

Mr Tay, who co-chairs the Financial Sector Tripartite Committee which helps professionals seeking to find new jobs in the sector, suggested adopting a sectoral approach to provide more targeted and focused help in sectors where affected by high job losses.

Last month, the Association of Banks in Singapore announced that it has initiated a jobs portal that allows its members to refer their staff for suitable positions in other banks.

NTUC director of youth development Desmond Choo, who is an MP for Tampines GRC, said more efforts are needed to help PMETs. “We need to be able to re-skill, re-tool them (to join) other growing sectors … like healthcare and ICT (information communication technology),” said Mr Choo. More could also be done to provide “hardship support” for the families of retrenched PMETs while they look for a job, he added.

Advanced data released by MOM in January showed that Singapore saw its worst year-on-year employment growth since 2003 last year.

Confirming the labour market’s sluggish performance, the latest MOM report said that excluding foreign domestic workers, total employment grew by 23,300 – or 0.7 per cent – last year, compared to increases of 122,100 (3.7 per cent) and 131,300 (4.2 per cent) in 2014 and 2013, respectively.
The growth in local employment was flat: Only 700 of the jobs added were filled last year by Singaporeans and Permanent Residents, compared to 96,000 and 82,900 in 2014 and 2013 respectively.

By Laura Elizabeth Philomin

lauraphilomin@mediacorp.com.sg 

Households feeling the pinch

 

Work needed: With layoffs hitting a six-year high last year, there has been a sudden surge in the number of applications for jobs.

WITH fewer clients using her contractor husband’s renovation services, 41-year-old commodity specialist Wong C.K. and her family have had to make swift decisions to cope with a smaller budget.

The family income has shrunk by more than half – from S$11,500 to S$5,500 (RM34,290 to RM16,400) – after her husband’s business fell by about 70% since 2014.

Their 10-year-old daughter now goes for group tuition instead of more costly private sessions, saving them S$250 (RM745.40) a month.

They will also opt for staycations in Sentosa, instead of their usual jaunts to Japan or South Korea for the annual family holiday.

“We still have some savings to lean back on, but this is not sustainable. We will give up the car if my husband cannot find a different job in the next two months,” she says.

With the economy set to grow at a modest 1% to 3% this year, econo­mists and MPs expect to see tougher times ahead, with many companies likely to see weaker profits or even losses as demand starts to dry up.

But for now, at least, households are likely to be sheltered from the heavy storms, supported by a tight labour market, strong wage growth that has bolstered savings over the past few years.

As Nee Soon GRC MP Lee Bee Wah puts it: “Families are coping for now, but they are probably more cautious in spending.”

Holland-Bukit Timah GRC MP Liang Eng Hwa, who chairs the Government Parliamentary Committee for Finance, says: “The economy is undergoing a cyclical downturn and it is likely to impact businesses and their bottomlines.”

But the relief could be temporary, especially if things turn much worse and retrenchments start to pile up. “With shrinking business orders, many companies are, understandably, on cost-reduction mode. The indicator to watch is job losses,” says Liang.

Last year, layoffs hit a six-year high, with the economy shedding about 15,580 workers, and the fear among observers is that this could snowball this year.

So far, there have been several high-profile retrenchment ­exercises.

In February, Japanese online retailer Rakuten and media company Yahoo axed a number of staff. Foreign bank Barclays also cut about 70 jobs here in January.

Among the most vulnerable are also likely to be the most educated with professionals, managers, ­executives and technicians (PMETs) particularly at risk.

This group formed 71% of the 15,580 Singaporeans and permanent residents who lost their jobs last year, up from 66% the year before.

This is disproportionately higher than their 54% share of the resident workforce last year.

Job recruitment firms have also noticed a sudden surge in the number of applications – a sign that more people are in need of employment.

For example, Kelly Services Singapore has had about 10% more applications from last December to this February, compared to the same period the year before.

At Human Capital Singapore, director David Ang says there are over 600 applications for nine job postings since January, but only 460 applications for the same number of job postings during a 10-month period from March last year.

“People need to moderate their expectations,” he adds, noting that there are also fewer vacancies in some sectors now.

These include industries like oil and gas, construction, electronic manufacturing, shipping and commercial banking.

The bigger worry is that workers who have been retrenched may not be able to find their way back to a job quickly.

A 50-year-old offshore engineer retrenched last July, who wants to be known only as Heng, says he now has more time to spend with his three teenage children, but worries about financing big-ticket items.

He and his bank officer wife have “more or less” paid up for their three-bedroom condominium in the east, “but there will come a time when we need to look at our funds and see if there’s enough to send our kids to university, and for retirement”.

“At my age and in my industry, though, it is hard,” he says.

The Government has recognised the problem and pushed hard for the national SkillsFuture movement, which hopes to promote lifelong learning and help workers stay relevant and competitive.

The results, however, may take years to manifest.

“For now, we need to look into what, and how, workers should specialise more deeply in their skills and find jobs,” says labour MP Desmond Choo, who is also MP of Tampines GRC.

“Middle-aged and mature workers might face challenges trying to find jobs even after retraining. A stronger push for place-and-train programmes might be what these workers find useful.”

Another labour MP and an MP for Tanjong Pagar GRC, Melvin Yong, points out that jobs are still available but the challenge is with job-matching.

“With better coordination, we can increase awareness of where the available jobs are, “ he says.

Although all seven MPs interviewed say there has not been a significant spike in the number of residents asking for financial assistance, they are also wary of an impending recession, and whether sufficient measures are in place to help them.

“The people who will be hardest hit are those who have been retrenched and still have significant loan repayment obligations, like homes,” says Choa Chu Kang GRC MP Yee Chia Hsing.

“Prevention is better than cure, so we need the economy to grow. As such, we must be careful that we do not overtighten foreign labour supply.”

Lee is also hoping that the Budget rolls out measures to help households cope with the slowdown, for instance, vouchers to offset the cost of public utilities.

For some workers like Sally Ho, 35, the key to surviving a slowdown is dialling down her expectations.

She left her bank officer job last year to join a medical solutions company. Though she took a 50% paycut, the new job is less demanding on time as a mother of two.

“It means eating out less, and not feeling envious when your former colleagues go on expensive holidays or buy a new bag,” she said.

“If you can do that, life may be a little tough, but overall, still fulfilling.” — The Straits Times/Asia News Network

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Rajan: ‘We can no longer ignore the elephant in the room, either theoretically or practically. – Bloomberg

SPRING is the time for conferences. I was lucky to join two excellent conferences last week. One was in Singapore organised by the Nanyang Technological University Para Limes Institute on “Silent Transformations”, followed by another on “Advancing Asia – Investing for the Future”, organised by the IMF and the Ministry of Finance, India in New Delhi.

Para Limes (www.paralimes.ntu.edu.sg/Pages/Home.aspx) is an institute dedicated to complexity studies – the idea that we cannot see the world from partial analysis, but must take into consideration the interconnected complex whole.

Professor Geoffrey West, former President of the Sante Fe Institute (the first of the complexity institutes founded out of the scientists that participated in the Los Alamos nuclear programme) and a leading thinker on growth, innovation and urban life, delivered a brilliant view on the sustainability of present growth models.

Modern life and culture is increasingly urban, because the larger the city, the more efficient the usage of energy and resources, but there are costs in terms of pollution, crowding and spillovers.

In other words, growth accelerates exponentially until the economy reaches maturity and slows down, and if there is no longer innovation and change, growth can even become negative.

Life follows an S-curve (sigmoid for the technically-minded), and therefore growth can only be sustained with continued innovation and reform – exactly what the Chinese are attempting.

West’s ideas resonated with me during the “Advancing Asia” conference, where the future of India became a major theme within the Asian growth story.

India is today one of the youngest (demographic labour force) growth stories, today the fastest growing and by 2050 the largest population in the world.

Without doubt, the Indians intend to use 21st technology to leapfrog traditional forms of growth, including development through knowledge and services, and less through manufacturing, currently dominated by East Asia. In contrast, the Chinese economy, currently the world’s number 2, is slowing and also aging.

In Beijing, the world sighed with relief as the Chinese Premier Li Keqiang committed to steady growth, stability in the RMB and continuous reform.

As oil prices seemed to stabilise at around US$40 per barrel and the Fed committed to slower interest rate adjustments, financial markets actually turned back upwards.

The Delhi conference was marked by extremely high quality debate on the future of growth models.

The key question before us is whether Asia, as one of the fastest growth regions, can overcome the global debt deflation. There is an existential question that the West (advanced countries including Japan) is unwilling to address.

Reserve Bank of India Governor Raghuram Rajan, arguably one of the most thoughtful of central bank governors, posed the question as the “elephant in the room” – a big issue that is right in front of us, but none of us want to address.

The basic question is why current growth is slowing and what policies can we adopt to get out of this debt deflation trap.

The advanced countries refuse to adopt fiscal expansion, because of internal politics and the growing debt overhang. Increasingly, they use quantitative easing (QE) or unconventional monetary policy to try and expand aggregate demand.

The trouble is that QE is outliving its usefulness, but has very negative spillovers on emerging markets, such as volatile capital flows, declining trade and lack of long-term investments.

The unspoken policy conundrum is that advanced countries refuse to admit that these spillovers matter.

Firstly, these spillovers are notoriously difficult to measure accurately. Secondly, central banks owe their allegiance to domestic authorities and would ignore pleas by neighbours or foreigners.

Thirdly, no one wants to admit that QE basically amounts to currency depreciation, which then forces emerging markets to also devalue in order to maintain their competitiveness.

Governor Rajan’s view is that we can no longer ignore the elephant in the room, either theoretically or practically.

If we continue to do so, the whole system could degenerate into a global deflation or worse.

Hence, he argued cogently for the beginnings of a conversation on how to grow stably and sustainably together, namely a consistent and legitimate set of international monetary rules.

The Delhi conference laid out the fundamental dilemmas in today’s growth trap. Monetary and fiscal policies are conducted through national agendas, which have spillovers onto others, but these policies do not add up in a global system.

Both the theoretical and geopolitical framework are partial, interactive and contradictory, because what is right for a single country can be wrong for the system as a whole.

Partial views are like blind men trying to describe an elephant. None of them get it right.

But partial or silo views end up with individual action or non-action that may be collectively wrong. For example, former Fed Chairman Dr Bernanke famously argued in 2005 that the US lost monetary control because of excess savings by the emerging markets.

From a system point of view, this is like an elephant complaining that it has become fat because the grass is growing too much. The grass grows because the elephant’s piss and poo fertilises the plain, whereas the gas emitted increases carbon as a spillover. Indeed, if there is too much liquidity provided, some of the smaller animals get drowned.

The yuan faces a similar dilemma. If it devalues, temporarily Chinese trade will recover, but if everyone devalues at the same rate, there will be no advantage.

However, China will have to undergo even more painful deflation with a stable exchange rate against the US dollar.

Because of China’s size, many of its trading partners could be hurt if China slows further.

Collectively, the current global monetary rules do not acknowledge a collective action to help make such adjustments more smoothly.

There is an old African and Asian saying that when elephants fight, the grass gets trampled.

The grass gets trampled even when elephants are dancing. We need collective and mutual understanding to get out of the oncoming global deflation.

But leadership and statesmanship are scarce when the dark clouds loom. For the next year or so, electioneering and partisan views will trump moderation and mutual understanding.

When bull elephants like Trump trumpet their charge, beware of global consequences.

By Andrew Sheng

Tan Sri Andrew Sheng writes on global issues from Asian perspective.


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Trump victory a major global risk: EIU

 

Short-sighted: Trump's unpredictable foreign policy policy is making many observers nervous - AFP

LONDON: The prospect of Donald Trump winning the US presidency represents a global threat on a par with militancy destabilising the world economy, according to British research group EIU.

In the latest version of its Global Risk assessment, the Economist Intelligence Unit ranked victory for the Republican front-runner at 12 on an index where the current top threat is a Chinese economic “hard landing” rated 20.

Anonymous launch ‘total war’ on Donald Trump to avenge ‘hateful’ campaign

Justifying the threat level, the EIU highlighted the tycoon’s alienation towards China as well as his comments on extremism, saying a proposal to stop Muslims from entering the United States would be a “potent recruitment tool for militant groups”.

It also raised the spectre of a trade war under a Trump presidency and pointed out that his policies “tend to be prone to constant revision”.

“He has been exceptionally hostile towards free trade, including notably NAFTA (the North American Free Trade Agreement), and has repeatedly labelled China as a ‘currency manipulator’.” it said.

“He has also taken an exceptionally right-wing stance on the Middle East and terrorism, including, among other things, advocating the killing of families of terrorists and launching a land incursion into Syria to wipe out IS (and acquire its oil).”

By comparison it gave a possible armed clash in the South China Sea an eight — the same as the threat posed by Britain leaving the European Union — and ranked an emerging market debt crisis at 16.

Defiant Trump stares down protesters after rally violence A Trump victory, it said, would at least scupper the Trans-Pacific Partnership between the US and 11 other American and Asian states signed in February, while “his hostile attitude to free trade, and alienation of Mexico and China in particular, could escalate rapidly into a trade war.”

“There are risks to this forecast, especially in the event of a terrorist attack on US soil or a sudden economic downturn,” it added.

However, the organisation said it did not expect Trump to defeat his most likely Democratic opponent, Hillary Clinton, in an election and pointed out that Congress would likely block some of his more radical proposals if he won November’s election.

Rated at 12 alongside the prospect of a Trump presidency was the threat of Islamic State, which the EIU said risked ending a five-year bull run on US and European stock markets if terrorist attacks escalated.

The break-up of the eurozone following a Greek exit from the bloc was rated 15, while the prospect of a new “cold war” fuelled by Russian interventions in Ukraine and Syria was put at 16.- AFP