KUALA LUMPUR: Malaysian property stocks have fallen more than 30 percent this year due to domestic politics and inflation, but an imminent increase in interest rates is dashing any hopes of bargain hunting.
The country’s property sector has also underperformed peers across Southeast Asia, themselves hit by rising interest rates that have stemmed the flow of cheap money to finance a boom in the region’s fast-growing economies.
“If the (regional) interest rate is still going up there’s still some downside risk,” said Jason Chong, chief investment office of Kuala Lumpur-based OSK-UOB Unit Trust Management, which manages the equivalent of $1.15 billion.
“Right now we are underweight property stocks. We want to wait until we think the interest rate (cycle) is about to turn,” said Chong.
Every central bank in Southeast Asia, with the exception of Malaysia, has hiked rates in recent months.
Malaysia’s inflation hit a 27-year high of 7.7 percent in June and was expected to remain above 7 percent in July and August. The Southeast Asian nation, a net exporter of petroleum, slashed fuel subsidies in June, causing a 41 percent rise in retail gasoline prices and a 63 percent jump in diesel prices. Malaysian politics has also been pretty turbulent in recent months, following the ruling coalition’s worst ever performance in a general election in March, which hit local markets.
Also, higher steel and building materials costs have forced developers to put new projects on hold. Even the relaxation of foreign ownership rules and a flood of money for upscale office and residential projects in the central business district in Kuala Lumpur has failed to dispel the gloom.
Investment bank UBS said it was far from clear that falling commodity prices would feed through to lower inflation and allow central banks to pause or even cut rates and thus stimulate the region’s economies.
“It may be wrong to peg hope on the current downtrend in commodity prices sustaining and bringing inflation lower,” UBS said in a report published last week.
Malaysia’s economy is officially projected to grow 5 percent this year, slowing from 6.3 percent in 2007, mirroring weakness across Southeast Asia.
Last week, Singapore released data showing its economy contracted at an annualized rate of 6 percent in the second quarter, its worst performance in five years. Its export-oriented economy is a bellwether for how a global economic slowdown will affect Asia. Prospects for Thai property stocks, viewed earlier this year as beneficiaries of a tax stimulus package, are also uncertain.
More pain for investors
Malaysian property stocks have taken a beating and analysts warn of more pain for investors.
IOI Properties, Malaysia’s top property firm by market value, has fallen 30 percent this year and second-ranked SP Setia has dropped about 34 percent, underperforming a 23 percent loss on the benchmark index.
The two stocks could see more downside based on their valuations in previous crises such as the September 2001 attacks and the 2003 SARS crisis, Credit Suisse said in a research note.
IOI Properties trades at 10.7 times 2009 earnings, which is 22-26 percent higher than the lows recorded in 2001 and 2003, while SP Setia’s current PE of 12 times 2009 earnings is much higher than the 7 times and 8.4 times in the crisis periods, Credit Suisse said.
Property stocks in Singapore and Thailand have fared better, with CapitaLand, Southeast Asia’s largest developer by market value, falling 21 percent this year and Thailand’s top housing company Land & Houses down just about 5 percent.
