The right way to grow
THE stock market is often regarded as a barometer for a country including its economy, but this depends on what factors are considered.

While the stock market indicates how well companies are performing, the Magnificent 7 illustrates how a market can be propelled upwards by a group of high performing stocks (Magnificent 7 is used globally to describe a group of high-performing tech stocks).

For the FBM KLCI, the recent earnings reporting season was a revelation of sorts. Earnings growth was much better than expected and research houses also note that revenue growth of companies grew by a hearty amount too.

According to CGS, earnings of stocks under its coverage grew 16.9% year-on-year for the first quarter of 2024, while revenues increased 10.1%. The profit increase was the first in 10 quarters.

Are earnings likely to stay strong or will they wean off as is the norm earlier in the year before tapering to a single-digit range by the end?

Going by some important market developments, the expectations may be different this time. Policy change has been the not-so-invisible hand that has stirred the pot of potential for the market and the economy.

The main gripe of the market and economy has been a dearth of market-moving policies by past administrations.

Past controversies like 1Malaysia Development Bhd adversely affected policy reforms and initiatives. The first PH-led government tried to unwind much of the troubles, more with political reforms rather than economic.

The Covid years did not help and left an inflation-driven aftermath. Thus the focus of pro-growth policies is rightfully on the agenda again.

The National Energy Transition Roadmap (NETR) and New Industrial Masterplan (NIMP) are positives for Malaysia but much remains at the lab stage. The full impact will only be felt down the road.

An unintended benefit is the growth of data centres (DCs). Stocks linked to the DC business have surged in recent months as investors are lured by the potential profit. It is akin to the glove mania during the Covid crisis.

Corporate Malaysia will have to learn from that lesson and not repeat the mistakes. The question is how much thought has been given to venturing into the DC business?

Do these companies have the expertise? It is costly to build and operate a DC and will it be for run-of-the-mill stuff or for more sophisticated AI-driven businesses?

With so many DCs popping up, getting people to use them is another concern. It is a stark reminder of China’s large-scale foray into the rubber gloves market. How that move affected the ecosystem of that business is already well known.

The authorities need some check and balance when assessing the flood of DC proposals. Can the country satisfy the power-gobbling demands of DCs?

Failure to plan an appropriate build-up can mean brownouts and that is something voters will not take kindly to regardless of the economic benefits.

Water infrastructure is another issue. Funds, mostly for pipe repairs, have been short in supply.

Reducing losses from non-revenue water must also be considered before thinking of new water sources for DCs. And no, underground reservoirs are not the solution as evident from the damage it has caused in neighbouring countries.

Among the biggest beneficiaries of the DC business will be Tenaga Nasional Bhd and the utility companies that will supply power and water. The country’s efforts to reduce carbon emissions would also be impacted if TNB were to fire up a coal plant as reported.

Malaysia’s authorities should also prioritise renewable power for manufacturers over DCs, given the greater economic benefits manufacturers bring to employment and wealth.

This article first appeared in Star Biz7 weekly edition.
Star Biz7,FBM KLCI,policies,data centres,DCs,pro-growth,policy reforms,stocks,Magnificent 7
Going by some important market developments, the expectations may be different this time. Policy change has been the not-so-invisible hand that has stirred the pot of potential for the market and the economy.