PETALING JAYA: For investors, 2008 is a year which they wished to forget as soon as possible after the KL Composite Index (KLCI) fell 38.9%.
The KLCI rose to its historic high of 1,516.22 on Jan 11 but the euphoria proved unsustainable in the later part of last year, as investors’ sentiment was battered mainly by the US financial crisis, which saw the exit of foreign funds.
Yesterday, it ended the year 4.88 points lower at 876.75, down from 1,435.68 on Jan 2. For the year, it had fallen 558.93 points.
This was the worst annual performance since the 1997/98 Asian financial crisis when the KLCI fell 51.7%. In 1997, the KLCI tumbled from 1,231.45 on Jan 3 to end the year at 594.44.
More than 10 years on, it was a reality check for retail investors, financial institutions and analysts following the fallout from the global financial crisis, the worst since the Great Depression.
For 2008, market capitalisation, including companies that were either delisted or taken private, shrank from RM1.057 trillion to RM663.80bil.
“Many were caught unprepared as they did not think how severe the impact of the US financial crisis would have,” said the chief investment officer of a local fund management company.
Analysts had earlier predicted that the KLCI would sustain above the 1,500-level in the first quarter of 2008, due to domestic and external catalysts which would buffer the stock market.
They had pinned their hopes on expectations of the general election in the first half, fiscal stimulus following the implementation of mega infrastructure projects and rising foreign direct investments and portfolio inflows.
The fiscal stimulus included the several mega Ninth Malaysia Plan projects in 2008. These comprised the RM12.5bil double-tracking rail project (Ipoh-Padang Besar stretch), the RM9bil Pahang-Selangor water transfer project, the RM9bil Bakun undersea cable project and the RM3bil Second Penang Bridge.
The market took a hammering in March after Barisan Nasional’s failure to garner a two-thirds majority in Parliament in the March 8 polls and also growing fears of a recession in the US.
When the market resumed trading on March 10, the KLCI fell 123.11 points, or 9.49%, to close at 1,173.22. Local sentiment was also affected after the Dow Jones Industrial Average fell to 11,740, its lowest level since October 2006, dropping more than 20% from its peak just five months ago.
On July 11, Indymac Bank, a subsidiary of Independent National Mortgage Corp, was placed under receivership, making it the fourth-largest bank failure in the US.
The KLCI hit a year-low of 829.41 on Oct 29 on heavy selling pressure, especially from foreign funds, which were repatriating their funds.
In the US, Treasury Secretary Henry Paulson had on Nov 12 abandoned plans to buy toxic assets under the US$700bil troubled asset relief programme. He believed the remaining US$410bil in the fund would be better spent on recapitalising financial companies.
Asian markets fell, with the KLCI skidding 15.19 points, or 1.71%, to 875.15 at the midday break on Nov 13.
For the year, stock exchange operator Bursa Malaysia Bhd 
fell the most in terms of prices, sliding RM9.15, or 64%, to end 2008 at RM5.15, reflecting the depressed equities market.
Aseambankers Equity Research head Vincent Khoo described 2008 as a “highly disappointing year for investors”.
He was surprised about the extent of the destruction of the credit derivatives market, which led to the financial crisis, and bailout of major banks.
In Malaysia, sentiment was affected by the surprising results from the general election, the windfall tax on independent power producers and also the levy on plantations.
Saturday, 10 Jan 2009 12:00 AM MYT
How Madoff madeoff with 2008
The year 2008 will be remembered as a rat of a year. Seemingly unending prosperity to August, and then the Lehman heart attack in September, as if someone pulled the plug, and half of our stock market wealth was flushed down the drain.
But the highlight must be the news that a paragon of New York society, a former chairman of Nasdaq no less, Bernard Madoff confessed to a Ponzi scheme of up to US$50bil. Madoff’s niece was his compliance officer and married a former SEC attorney. Members of the Madoff family served on various regulatory advisory bodies. Didn’t someone accuse us Asians of crony capitalism in 1997?
I got an SMS the other day that said: “One year ago, RBS paid US$100bil for ABN AMRO. Today, that same amount would buy: Citibank US$22.5bil, Morgan Stanley US$10.5bil, Goldman Sachs US$21bil, Merrill Lynch US$12.3bil, Deutsche Bank US$13bil, Barclays US$12.7bil, and still have US$8bil change ... with which you would be able to pick up GM, Ford, Chrysler and the Honda F1 Team.”
Well, if Mr Madoff had waited, with US$50bil, he could have picked up Citibank, Deutsche and Barclays and then control over US$2 trillion in assets. Just think what a Ponzi scheme that could be.
Relaxing in Bali over Christmas and reading Nial Ferguson’s The Ascent of Money and Mandelbrot’s The (Mis)behaviour of Markets, I noted how Darwinian everyone has become. It’s all about the survival of the fittest, as if losing US$50 trillion in wealth in a year (US$30 trillion in global stock market capitalisation and roughly US$20 trillion in real estate value), equivalent to one year of global GDP, is part of nature’s punishment for human excesses.
Of course, Eric Beinhocker was the first to say in his book The Origin of Wealth that money was as Darwinian as “The Origin of Species”, pointing out that we all want wealth because of the reproductive urge: SMS – Sex, Money and Status. Power, as Henry Kissinger said, is the ultimate aphrodisiac.
If we believe that financial crisis is built into the human genome, then this crisis is clearing the system – selective evolution for those who can survive and who should be extinct.
For example, investment banks have become extinct as a separate legal entity in the US, having become bank holding companies regulated by the Fed. Crisis levels the playing field. In 2007, the buzzword in the West was how opaque and bad Sovereign Wealth Funds were. By 2008, the West owned one quarter of the capital of their banking system and has also become the world’s largest Sovereign Wealth Funds. Free market fundamentalism is dead and we are all now interventionists.
The fascinating thing about the current financial crisis is the way the US dealt with the crisis in lightning speed. Just think, in less than a year, the Fed has brought interest rates down to zero, whereas it took the Bank of Japan more than 10 years.
There are two implications of a zero interest rate policy. First, since the price of money is no longer a policy tool, expect more quantitative intervention. Look how quickly the balance sheet of the Fed has expanded and how the US fiscal balance sheet is changing.
During the 17-year deflation after the Bubble of 1989, the Japanese fiscal situation deteriorated to over 180% of GDP. The good news is that it is mostly owed to Japanese nationals, the bad news is that future generations have to pay for that debt.
Second, if interest rates cannot be used to influence the market, expect pressure on other asset prices, especially exchange rates. Note how volatile the Yen became after interest rates could not be used to influence the exchange rate. And if exchange rates become too high or too low, expect more government intervention, either verbally or directly.
Looking at markets from a perspective of comparative history is always useful. Nial Ferguson pointed out that in Europe, at the beginning of the 20th century, bank capital was more like 25% of total assets, in the days before off-balance sheet accounting, whereas modern banking has a regulatory minimum of 8%.
However, if we count off-balance liabilities, the true capital against risks is more like 4%, meaning that if markets move more than 4%, the banking system is bust if we mark all assets to market.
Clearly, 2009 will be a year of deleveraging, as consumers and banks reduce their debt levels, whilst central banks and governments prime pump the deflating global balloon. 2009 is also the Year of the Ox, exactly as in 1997, the Year of the Asian financial crisis. Is it going to be a year of bull? Watch this space.
l Datuk Seri Panglima Andrew Sheng is adjunct professor at Universiti Malaya, Kuala Lumpur, and Tsinghua University, Beijing. He has served as adviser and chief economist to Bank Negara, deputy chief executive of the Hong Kong Monetary Authority and chairman of the Hong Kong Securities and Futures Commission. His column will appear monthly.
