Saturday, 26 March 2016 The tide is high, so keep holding on

by **Cals** Mon 28 Mar 2016, 01:09

Saturday, 26 March 2016

The tide is high, so keep holding on

BY MIDF RESEARCH

[You must be registered and logged in to see this image.]
MALAYSIAN assets are regaining its buoyancy.
Money left the country last year following a confluence of negative events such as beaten commodity prices, strong recovery in the US economy and negative sentiments in the local market. But the trend is reversing now. After several quarters of pessimism, investors are returning to the market across various asset classes in hopes of seeking stronger gains. That’s because Malaysia was deemed one of the laggards in the region.
One of the main reasons foreign investors cashed out of Malaysian assets last year was due to the deteriorating ringgit, which fell 18.6% against the greenback as macroeconomic developments turned unfavourable for the local currency.
Thus far this year, Malaysia has been the biggest beneficiary of money flowing back to emerging South-East Asian markets. From March 1 to 24, cumulative net foreign purchases already amounted to US$1.23bil (RM5.01bil) and if the buying streak continues, money flow in March is set to be the highest since April 2013, which was just before the 13th general election.

The Malaysian equity market has gained from the tide of global liquidity flowing into Asia. Among others, some money from global funds in China might have been reallocated to other Asian markets like Malaysia as prospects for the world’s second largest economy wane.
In the bond market, the yields for Malaysian Government Securities are starting to look attractive compared with other countries that have recorded negative rates. For instance, the average yield on a 10-year dollar bond in Malaysia is higher by some 140 basis points than a similar US Treasury 10-year note.
Coupling that with the anticipation of ringgit’s stabilisation and recovery, foreign investors have a stronger conviction to buy Malaysian assets. Among the Asian emerging-market currencies, the ringgit is the best performer over the past three months, gaining over 2% versus the greenback.
The US dollar/ringgit exchange rate has strengthened to below the RM4.00 level from RM4.46 at the trough in September last year. Fundamentally, the worst could be over for two of Malaysia’s main export commodities.
Crude palm oil (CPO) traded at an average of RM2,202.15 per tonne in 2015 and is expected to surge up to RM3,000 per tonne in the second quarter this year as a result of the hot weather, which leads to lower fresh fruit bunch production.
Meanwhile, Brent crude oil has rebounded above the US$41 per barrel level from the lows of under US$30 per barrel in January. The Government has revised Budget 2016 based on the assumption that Brent trades between US$30 and US$35 per barrel while we expect Brent to trade at an average of US$40 per barrel in 2016.
The string of changes from a macro view was a result of the changes in several major market forces. The US Federal Reserve has turned dovish in its view of the state of the US economy. The Federal Reserve has indicated it will increase interest rates twice a year as compared to fourth times previously. Following which, currencies of emerging markets rallied, including the ringgit, which was the most battered currency in South-East Asia last year. And the weaker greenback bodes well for commodity prices.
In China, jittery surrounding the world’s second largest economy seems to have eased as capital outflow from the republic moderates. With that, the yuan has stabilised as the markets become more rational about China’s growth.
On top of that, negative interest rates in Europe and Japan are benefiting the global equity markets. Central banks in the region are also loosening their money policies so more capital is available in the market. Last week, Indonesia’s central bank cut its interest rate for the third time this year to boost economic activity in the country.
In view of the turn of events, sentiment for the local bourse has improved over the past three weeks. Foreign investors have been net buyers of Malaysian stocks while some local investors took the opportunity to take profit. The rotational profit-taking activities have capped the benchmark index from a steep hike. Instead, it has been climbing slowly.
That said, investors who see value in certain stocks might take the opportunity to accumulate during a correction. The major events that could affect foreign investors’ sentiment include the appointment of Bank Negara’s new governor as well as the outcome of the Sarawak elections.
But in the longer run, the FBM KLCI is expected to reach 1,800 by year-end compared to 1,693.14 points recorded on Dec 31, 2015.
It is still early days in the recovery of the Malaysian stock market as the benchmark FBM KLCI has only risen by less than 1% year-to-date. In comparison, the Bangkok SET Index is up by about 9%, the Philippine Stock Exchange Index has jumped 6% and the Jakarta Stock Exchange Composite Index has added 5%.
Previously, corporate earnings came below our expectations for six consecutive quarters since 2014. But that has changed since the third quarter of 2015 as company performance met our estimations.
Hence, companies that have high foreign shareholdings are likely to benefit from the return of foreign funds. (Refer to table).
Since March, foreigners have been net buyers every single day of the 18 trading days in the month – a phenomenon not seen in two years. Meanwhile, the ringgit continues to strengthen against the US dollar, indicating that the underlying foreign fund flow is still strong.