Stocks and Economy Stability – 3 Main Factors

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Jun 04 2007
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The debate of whether the bubble will burst especially in China is heating up. Even though U.S. is still the economic super-power mainly due to its’ ability to import and absorb trillions of products and services overseas, China is believed to be the country which could spark the fire which might burns the forest for months or probably years should that happened. There’re two schools of thought, one believes China economy is too huge with more potential to go even higher with greater stamina and should the bubble burst, it won’t happened now. The justification is that the China government which has trillions of dollars in reserve simply won’t let it happen, not before the Olympic 2008. With such simple deduction, Chinese continues to flock at stock broker houses and judging by the number of new stock trading applications being processed, indeed it seems the Bulls are still running happily.
The other school of thought is mainly consists of non-Chinese outside of China’s perimeter (this includes certain Hongkies) who think otherwise. This second group of investors had their fingers burnt before and generally have experienced the economic bubble-burst or at least recession once in their lifetime. So, they know the pain when they lost everything almost overnight due to over-exposure. Ask any Hongkies on the street if they’re affected by 1997 Asia Crisis and chances are they would tell you they’ll remember that year for the rest of their life. Although HongKong has one of the highest foreign reserves amongst Asia countries, the reserves were not the magic bullet when recession hits. Economically it’s wise to let the market force takes it’s course rather than pumping the reserves trying to stabilize the waves of destruction.
Spin the globe to a small country located north of Singapore called Malaysia. This is probably one of the most gifted countries in the world as far as natural resources are concern. Enough of how tins, rubbers, palm oils and now petroleum enrich the small population of less than 30 millions in Malaysia. A fast comparison between Malaysia and Singapore will tells you the main disease which is pushing Singapore forward but pulling Malaysia backward. It boils down to the government’s efficiency in administrating the countries. There’re basically three main global and internal events which can cause another economy uncertainty to Malaysia:
  1. U.S. economy – Malaysia reported today its’ export missed forecast as overseas demand for electronics decline for a third straight month. Overseas sales increased 0.9 percent versus expectation of 4.1 percent gain. Malaysia which depends on U.S. (largest export market) for the electronic goods is affected by the super-power’s slowing growth. Exports of electrical and electronics goods fell 11 percent to 19.6 billion ringgit in April but this sector constitute 42 percent of Malaysia’s export. Meanwhile, sales of crude oil fell 19 percent to 2.19 billion ringgit. Should U.S. economy continue to slow or stagnant, Malaysia’s export figure might be the biggest headache for the government. Since you can’t control import figure much, you can only enhance export for a better surplus. How you make full use of the surplus is another issue, so wise-government spending is crucial to balance the overall prosperity of the country.
  2. China’s factor – As much as I hate China’s economy bubble to burst, it’s always wise to prepare for the worst. The way speculators or rather gamblers buying and pushing the stocks skyrocket are something which gives you the indicator how the bubble is building now. The bubble is definitely there, it’s a matter of how fast the air is being pumped into the balloon and how strong can the balloon takes the incoming air pressure before it burst. This China government will not simply take the action of raising lending interest rate by 0.18 percentage point to 6.57 percent without a strong reason. And the domino-effect of a burst thereafter is something which the government itself wouldn’t dare to imagine.
  3. Accounting irregularities – the recent Transmile Group Berhad (KLSE: TRANMIL, stock-code 7000) and to a certain stage Bumiputra-Commerce Holdings Berhad (KLSE: COMMERZ, stock-code 1023) accounting irregularities could have a prolong effect to investors confidence if it’s not being handled with care and transparent as being voiced out by various parties. Any sign seen as cover-up could be concluded as more irregularities are being swept under the carpet. The last thing the government would like to see is the pull-put by this last-batch of investors who have just begun to have a little confidence on the current administration.

While there’re more factors affecting a country’s economic stability, at this moment the above three would be the most crucial pillars for a volatile country such as Malaysia which chose to put herself in such scenario rather than climbs the value-chain to reduce the dependencies.

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