As
we usher in the New Year after the benchmark FBM KLCI closing in the
positive zone in 2017 — the first time in three years, many investors
would ponder whether the strong momentum could continue into 2018. The
following is the list of factors that could possibly swing the market
moving forward:
Malaysia’s GE14
The much anticipated 14th general election (GE14) did not materialise
in 2017, will definitely take place in 2018 before Aug 24 this year as
the mandate of the ruling Barisan National (BN) coalition will end in
June 2018. Analysts have in general expects the GE14 to be the main
driver of investors’ sentiment in early 2018 before a return to
fundamentals post GE14. So far, most research analysts view that the
poll is likely to be in between February and April. The pre-election
rally is expected to lift sentiments and improve the “feel-good” factor,
which is important for incumbent governments.
The election-play counters, companies that are perceived to have a
political favour or have the potential to benefit from a good
performance at the ballot box by the incumbents such as Utusan Melayu
(M) Bhd, George Kent (M) Bhd and Felda Global Ventures Holdings Bhd, to
name a few, would draw some interest from traders and investors.
Of course, just as with everything the upcoming GE14 could also pose a
downside risk to the equity market as it might act as a short-term
dampener on foreign investors who are wary of political risks. Risks to
the equity market also include the outcome of the election, especially
since most analysts have not priced in the possibility of an
unprecedented victory for the opposition. The return of Malaysia’s
longest-serving prime minister, Tun Dr Mahathir Mohamad, to active
politics, has definitely added a new variable into the equation.
Should the unexpected happen, investors, both local and foreign
alike, will most likely have to revisit the drawing board to evaluate
the unchartered territory as BN has ruled since independence. This would
lead to an immediate knee-jerk reaction to the stock market.
Price stability in crude oil
The positive outlook and price stability in crude oil are viewed as a
positive driver for Malaysia’s economy. The government has factored
only a US$52 per barrel crude oil price in its Budget 2018’s revenue
assumption. Every addition of US$1 per barrel will add up to RM300
million in government’s revenue and narrow the deficit by two basis
points, according to TA Securities.
This is positive from a sovereign credit rating perspective, which
could also attract foreign investors into both the domestic equity and
bond markets in Malaysia.
The oil and gas companies that are listed on Bursa Malaysia will also
benefit from a stronger and more stable oil price in 2018 after a
disappointing performance in the last three years for most of the
companies. With most of the impairments being done in previous years,
some of these companies might return on investors’ radar as the oil
price continues to make its climb.
Nonetheless, in Petronas’ report on Activity Outlook 2018-2020, it
highlighted three key factors that are critical for oil prices to gain
strength. The first one is the compliance by Organization of the
Petroleum Exporting Countries (Opec) and non-Opec countries on the
output cut accord. The response from US tight oil players is also key to
price recovery. It added that the ability to reduce breakeven cost from
collaboration with service providers, especially deployment of
innovative technology, has sustained the level of tight oil drilling
activities in the US.
On the demand side, Petronas highlighted that a sustained healthy
global demand growth will facilitate oil stock drawdowns and
subsequently hasten global oil market rebalancing. TA Securities also
pointed out that Saudi Arabia’s resolve to maintain high crude oil
prices may weaken post potential listing of Saudi Aramco in the second
half of 2018. Furthermore, a possible fix to US shale players’
shortcomings in boosting supply, such as storage of hydraulic fracking
crew and equipment, could limit the upside for oil prices.
Stronger ringgit
The ringgit has make its comeback in 2017 and most research houses
expect the trend of a firmer ringgit against the US dollar to continue
this year. The local currency is viewed to have been oversold given the
prolonged losses in 2014 to 2016. The ringgit is undervalued in view of
the supportive fundamentals, a more stable oil price, external reserves
rebuilding, sustained trade and current account surpluses, progress in
fiscal consolidation, receding foreign holding risk in the bond market
as well as resumption in the repatriation of export earnings.
Affin Hwang Investment Bank Bhd said in its Malaysia Strategy 2018
Outlook report that typical beneficiaries from a stronger ringgit from
an operational perspective includes airlines, auto and media companies
on lower operating costs. As for the balance sheet, those with a higher
proportion of US dollar-denominated borrowings are also likely to see
improvement.
The stronger ringgit would have a negative impact on exporters, such
as rubber glove players and semiconductor companies but Affin Hwang
noted that the negative currency impact on some of these players would
be mitigated by the growth drivers in these sectors.
Monetary tightening and unwinding of QE
The US has started the ball rolling with its rate hike and unwinding
of its quantitative easing (QE). In October last year, the US Federal
Reserve started to unwind its balance sheet, starting at US$10 billion
every month and this will rise by US$10 billion each quarter onwards to a
maximum of US$50 billion per month.
The market is expecting another three rounds of rate hikes in 2018.
The latest US tax cuts in 2018 that have just recently been passed will
also lead to a stronger US dollar and greater inflation. Inflation could
rise faster than expected when the higher disposable income from the
US$1.4 trillion tax savings over the next decade filters through the
economy.
The faster-than-expected tightening in the developed markets could
also induce volatility in financial markets due to rapid capital
outflows from emerging markets such as Malaysia.
In Malaysia, it is also likely that the central bank will follow suit
as expectations of a hike in the overnight policy rate (OPR) has
increased on the back of a strong gross domestic product (GDP) growth in
the first three quarters of 2017. The prospect of Bank Negara Malaysia
raising the OPR will provide a near-term catalyst for the banking sector
as banks benefit from an interest rate upcycle as loans are repriced
quicker than deposits. Of course, the Malaysian banking sector could see
some impact from the implementation of MFRS9 but research houses, such
as Affin Hwang, do not foresee any material impact on earnings as asset
quality remains healthy.
Corporate earnings expected to grow
Corporate earnings among Bursa-listed companies had been disappointing considering the strong GDP growth in 2017.
Moving forward, as global economy continues to show synchronised
expansion, investors will need to see improvement in earnings to be
convinced.
According to Maybank Investment Bank (IB) Research’s report on 2018
Outlook & Lookouts, which was published in mid-December last year,
global growth momentum is set to be maintained in 2018, expanding at
3.6%, the same pace as in 2017.
Maybank IB Research expects a 5.3% growth in 2018, with domestic
demand to continue as growth driver on the back of continued growth in
consumer spending, public consumption and gross fixed capital formation
on expansions in both private investment and public investment.
Maybank IB Research has a core earnings growth estimate of 7.9% for
2017 and forecast of 9.7% for 2018 as compared to the “no growth” years
between 2014 and 2016. Similarly, TA Securities expects earnings growth
under its coverage to increase by 6.1% and 7.5% in 2018 and 2019
respectively.
External risks remain
Being an open economy, Malaysia is highly exposed to external risks,
such as trade protectionism and economic nasionalism, seen in the US
under President Donald Trump.
Trump has repeatedly spoke of his intent to rectify persistent trade
imbalances and trade barriers with other countries — with China being on
top of that list — any trade war or implication of one among the two
largest economies in the world will affect the world, including
Malaysia.
The uncertainty revolving Brexit as well as rising geopolitical
tension between some of the countries could also impact investors’
sentiment. Among the main concerns involving geopolitical tensions are
the ongoing feud between the US and North Korea, Arab Saudi and Iran. A
potential war would put synchronised global economy expansion at a halt.
Source:
The Edge Financial Daily