Highlight Markets have priced in Fed rate hike

by **Cals** Fri 18 Dec 2015, 20:25

Highlight

[size=28]Markets have priced in Fed rate hike

By Ahmad Naqib Idris / The Edge Financial Daily | December 18, 2015 : 8:54 AM MYT

This article first appeared in The Edge Financial Daily, on December 18, 2015.

KUALA LUMPUR: The rate lift-off by the United States could have a positive impact on regional countries, including the ringgit, as the hike has already been priced in by the market, Malaysian Rating Corp Bhd (Marc) said.

The US Federal Reserve (Fed) yesterday raised interest rates for the first time since 2006, by 0.25 percentage points to between 0.25% and 0.5%, as it expects the US economy to continue performing well.

Marc chief economist Nor Zahidi Alias said theoretically, the US dollar is expected to strengthen following the rate increase, based on the fact that the greenback has yet to exceed one standard deviation above its historical mean against major currencies, offering some room for the US dollar to appreciate.

“This, however, remains to be seen, as the rate hike has been largely priced in, in the currency market. In fact, based on past experience, the rate hike in the US in 2004 was accompanied by a weakening US dollar against major currencies,” he told The Edge Financial Daily.

“And this scenario may unfold again, largely due to better transparency in [the] Fed’s communication. And this is positive for the regional currencies, including the ringgit,” said Nor Zahidi.

He said it remains to be seen whether there will be continued capital outflows from Malaysia, due to the expected strengthening in the US dollar following the rate hike.

“This remains to be seen, as recent statistics indicate that the bulk of the outflows were from short-term papers. Foreign holdings of Malaysian Government Securities (MGS) have remained sturdy and in fact have risen from its recent low of RM162 billion in September 2015.

“If history is any guide, the rate hike will not induce MGS yields to climb as much as some people [may] think. In 2004, both [the] US Treasury and MGS yields actually declined after the rate hike took place,” added Nor Zahidi.

Minister in the Prime Minister’s Department Datuk Seri Abdul Wahid Omar expects the ringgit to eventually trade at the 4.2 level against the US dollar, reiterating that Malaysia’s economic fundamentals remain intact.

“People invest in this country for its stability, macroeconomic fundamentals and sound policies.

“I think this will continue. Our fundamentals are strong, we have a diversified economy and revenue sources, a diversified export market, we maintain a reasonable level of fiscal discipline and we have adequate reserves,” he said.

The ringgit closed 0.07% higher at 4.313 against the US dollar yesterday, after touching a high of 4.3025, according toBloomberg’s data.

On capital flows, Maybank Investment Bank Bhd regional chartist Lee Cheng Hooi said the narrowing differential between the Malaysian and US interest rates would generally favour the greenback over the ringgit.

“This may generally fuel an equity flight back to the US and other parts of the world from Malaysia,” he said.

Fitch Ratings Ltd associate director of sovereign ratings Sagarika Chandra said Malaysia remains vulnerable to a shift in investor sentiment following the rate hike, due to a large share of non-resident holdings of MGS.

Nevertheless, he is of the view that a flexible exchange rate and large gross external assets will continue to cushion Malaysia’s vulnerability to outflows.

“Additionally, the ability of domestic agencies, such as the Employees Provident Fund to provide funding in the event of a sell-off by non-residents, is expected to continue to support the sovereign’s domestic funding needs,” Sagarika said.

On the equity side, Nomura said the Fed rate hike sets up Asean markets for decent gains in 2016, also supported by stabilisation in China’s growth and reduced oil price volatility.

While it expects Malaysian equities to see some upsides in the near term, in line with the positive regional outlook and helped by ValueCap Sdn Bhd’s entry into the local market, it said outperformance is unlikely due to the weaker earnings outlook.

“Malaysia’s near-term growth [is] slowing due to tighter fiscal policy and falling commodity prices, and the outlook for long-term earnings growth is also subdued. Lower commodity prices, fiscal consolidation and rising costs are weighing on domestic demand, even as the export sector continues to perform well and support overall gross domestic product,” it said.

Nomura prefers companies with earnings visibility such as banks and beneficiaries of the weak ringgit, including healthcare stocks and other export-oriented stocks.

“We recommend neutral positioning in chemicals, consumer discretionary and utilities sectors, while being ‘underweight’ [on the] energy, staple, industrial and telecommunications [sectors],” it said.

Nomura’s stock picks include Malayan Banking Bhd ([You must be registered and logged in to see this image.] Valuation: 2.70, Fundamental: 1.50), Karex Bhd ( Valuation: 0.30, Fundamental: 2.10), IJM Plantations Bhd ( Valuation: 0.80, Fundamental: 1.05), Genting Malaysia Bhd ( Valuation: 0.80, Fundamental: 2.70) and Tenaga Nasional Bhd ( Valuation: 1.20, Fundamental: 1.30). It remains “underweight” on Malaysia.
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