Published August 16, 2008

No respite for battered Malaysia property stocks: analysts

More pain to come from imminent interest rate hike, slowing economy

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(KUALA LUMPUR) Malaysian property stocks have fallen more than 30 per cent 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 South-east 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 officer of Kuala Lumpur-based OSK-UOB Unit Trust Management, which manages the equivalent of US$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.'

Every central bank in South-east Asia, with the exception of Malaysia, has hiked rates in recent months.

Malaysia's inflation hit a 27-year high of 7.7 per cent in June and was expected to remain above 7 per cent in July and August. The country, a net exporter of petroleum, slashed fuel subsidies in June, causing a 41 per cent rise in retail petrol prices and a 63 per cent 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 material 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 that 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 per cent this year, slowing from 6.3 per cent last year, mirroring weakness across South-east Asia.

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 per cent this year and second-ranked SP Setia has dropped about 34 per cent, underperforming a 23 per cent 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 per cent 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 seven times and 8.4 times in the crisis periods, Credit Suisse said. -- Reuters