At the beginning of the week, the FBM KLCI tumbled at the opening bell in line with the slump at most regional markets. Turnover was nearly 200 million shares valued at RM79.52 million.
Wall Street suffered another bruising blow as deepening concerns over the slowing Chinese economy continued to unnerve global equity markets, according to Reuters.
Asian stocks slid to a two-year low as the selloff that has spread to almost every corner of the global equity market intensified, spurring demand for haven assets.
The safe-haven yen rallied and key government bonds were bought from the widespread unrest in the financial markets, set in motion nearly two weeks ago when China devalued its currency and generated fears about the state of its economy.
This put further pressure on the Malaysian bourse as foreign funds have pulled circa RM12 billion out of the nation’s shares this year as the benchmark FTSE Bursa Malaysia KLCI Index retreated.
“Today has all the hallmarks of being one of the worst trading days of the past five years,” said Evan Lucas at IG Markets.
“The reaction from Asia today will be symptomatic of the current investor sentiment and belief that a hard landing (in China) is inevitable.”
The losses early Monday followed a steep fall in US and European stocks, while several commodities plunged to multi-year lows and emerging market currencies took a battering.
Global equities have lost more than US$5 trillion in value since China’s shock currency devaluation on August 11 sparked fears the world’s number two economy is slowing more than thought.
Wall Street saw heavy falls on Friday, with the Dow Jones Industrial Average posting its worst single-day sessions in four years, after data showing Chinese manufacturing activity slowed to a 77-month low added to the gloomy picture. China said it would allow its huge state pension fund to buy equities, after a package of measures unleashed by Beijing last month to shore up equities failed to stem the rout.
The fund, which had some 3.5 trillion yuan (US$550 billion) in net assets at the end of 2014, will be able to invest up to 30 per cent in equities, according to a state media.
But analysts said the move would not be enough to stem the losses in Chinese shares at a time when global market sentiments was bleak.
“The market is going to drop further. It’s normal as the markets across the whole world are falling,” Qian Qimin, an analyst from Shenwan Hongyuan, told AFP.
“The entry of the pension fund will take a long time to happen. And valuations are still not cheap.”
Oil prices also fell, after breaking below US$40 barrel for the first time in six years
Data showing the number of US drilling rigs rose last week, despite the slump in prices, added to concerns a global supply glut will last for years.
When looking at the impact on KLCI, there are many factors involved including investor sentiments, global economic situation, currency as well as politics.
Make no mistake, with the exodus of foreign investors, the local bourse’s volatility is increasing, with a gauge of 30-day price swings rising to its highest level in six months.
The stock measure trades at 15.2 times projected 12-month earnings, or about 10 per cent higher than the MSCI Southeast Asia Index said Bloomberg.
The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) noted that the FBM KLCI was actually dipping into bear territory early Tuesday morning before buying support emerged and quickly pulled the benchmark index out of the red zone.
The ensuing technical rebound managed to lift the FBM KLCI more than 80 points away from the bear threshold levels.
Therefore, despite the massive August drumming, it is notable that the local bourse has yet to decisively enter into the bear territory, let alone to be classified as a bear market.
Devaluation of the ringgit
Exacerbating this is the current fall of the value of the ringgit as it hit beyond RM4.20 to the dollar.
However, a devalued currency results in inflation. In the short term, this can lead to a reduction of the trade deficit, but in the long term, unless everybody in the country earns a proportionate amount more, people’s buying power goes down even though they might make more money.
The ringgit continues its decline with traders continuing to unload the local note which is currently under pressure from a lack of domestic leads, falling crude oil prices, and sustained worries about China’s economy.
To showcase the current slump of the local note, the ringgit has hit below RM3.00 to the Singapore dollar for the first time. With analysts noting that the outlook for Asian currency remains for further falls as economic pressure is continuing due to falling oil prices and China risks.
MIDF Research noted that beginning August this year, as if taking turns, it was (and possibly still is) the ringgit who came under intense selling pressure.
The timing of the ringgit selloff however seemed awkward as Malaysia’s recent economic data have surprised on the upside with better than expected trade and GDP figures. Additionally, there were no recent major monetary actions from Bank Negara Malaysia (BNM) that may explain the sheer Ringgit decline.
“We reckon the main sources of ringgit’s sharp decline in August were neither domestic monetary nor economic in nature, but arguably emanated from the recent conflagration of domestic political rows involving both inter- and intra-party spats, as well as the surprise decision by People’s Bank of China (PBOC), the China’s central bank, to devalue its currency.
“Having said that, it is important for the currently distressed ringgit to regain its course and re-track the major G7 currencies. We reckon any prolonged failure of the ringgit to regain its course may result in an unfavourable shift in Malaysia’s macro prospects and, by extension, the corporate earnings outlook,” it said.
Extent of ringgit underperformance matches earlier selloffs in Japanese Yen and Euro. It is notable that the magnitude of ringgit relative depreciation has thus far matches the circa eight per cent-points underperformance of the earlier selloffs affecting the Japanese Yen and Euro.
“Hence, looking forward, we incline to imagine that the ringgit would similarly regain its course and duly re-converge against the Euro and Japanese Yen within a span of circa two to three months.
“It is important for the ringgit to regain its course and re-converge, failing which it may unfavorably alter the nation’s macro prospects and, by extension, the corporate earnings outlook.
“As stated in our previous report: “Provided that the prevailing foreign exchange (FX) dynamics continue on to prevail, in our view, the weakening of ringgit against the US dollar would not in itself result in material derailment of the nation’s macro outlook.
“Hence any unfavorable shift in the FX dynamics would possibly result in macro derailment. In order to realise the reconvergence, we believe it may require de-conflagration of the domestic political rows, as well as an end to the knee-jerk devaluations of China’s Yuan,” it added.
Now keep in mind when looking at the broader picture, a strong currency gives a nation purchasing power and is just a ‘tool’ to help facilitate trade. It is a medium of exchange that two parties again has value.
FOREIGN RESERVES
Going back to economics 101, there are a few tools a country uses to buffer economical impacts on the local scene. Among these are the foreign reserves.
In the past, during the Bretton Woods system — an international monetary system formed after the Second World War, foreign exchange reserves were used by countries through their central banks to maintain the external value of their currencies at fixed rate.
Subsequently, with the collapse of this system, the focus changed. Reserves are now generally maintained by countries for meeting their international payment obligations, besides helping to boost the confidence of the market in the ability of a country to meet its external obligations and to absorb any unforseen external shocks, contingencies or unexpected capital movements.
Malaysia’s foreign-exchange reserves declined beyond US$100 billion in a sign the central bank is still trying to slow Asia’s worst currency loss amid the drag from foreign sell off.
Foreign reserve holdings fell to US$94.5 billion (S$31.92 billion) in the first 14 days of August from two weeks earlier, and Bank Negara Malaysia data showed that they dropped below US$100 billion last month for the first time since 2010.
Malaysia’s Balance of Payments (BoP) recorded a lower current account surplus of RM7.6 billion in 2Q15 as compared to RM10 billion in the previous quarter mainly due to a lower surplus in the goods account and a higher deficit in services account said the research division of Ta Securities Holdings Bhd (Ta Research).
“While we do not foresee a deficit of current account balance in the near term, a deteriorating current account surplus on top of fiscal deficit risks can affect investors’ sentiment. Such a scenario could post risk of greater volatility in capital flows,” it said.
While Southeast Asia’s biggest economies excluding the Philippines have all drawn down reserves this year, Malaysia’s slid four times as fast as those in Indonesia, whose rupiah is the second worst-performing currency.
In a statement to Reuters, BNM said the reserves are sufficient to finance 7.5 months of imports. Two weeks ago, it said reserves could cover 7.6 months.
Economists disagree on what’s a safe level of import-cover for reserves. Long ago, many considered three months safe, but with greater global capital flows, some consider the minimum six months.
Khoon Goh, senior FX strategist for ANZ in Singapore, said Malaysia has the lowest import cover ratio in the region, and that is ‘a source of vulnerability.’
“If you have a big war chest, the market knows you have the ability to step in so they are more cautious,” he said. “In the case of Malaysia, markets know their intervention capability is limited.”
Andy Ji, Asian currency strategist for Commonwealth Bank of Australia in Singapore, said Malaysia’s reserves are adequate to satisfy redemption needs but onshore dollar demand is likely to be ‘overwhelming.’
“Earnings at companies on the KLCI are projected to grow 11 per cent in the next 12 months, data compiled by Bloomberg show. That compares with a 41 per cent gain in Thailand and an increase of 82 per cent in Indonesia,” Bloomberg said in a previous report.
“Investors are worried,” said Richardson, who has been underweight Malaysian equities since November. Stocks in the nation would only start to look attractive “if some of the adverse developments” are resolved, he said.
The main reason for the increase in sell-off in the ringgit is Malaysia’s dwindling foreign exchange reserves, which fell to a US$94.5 billion on August 14 from US$96.7 billion on July 31.
The lower a country’s reserves, the less it is able to do to shore up a sinking currency.
Meanwhile, capital outflows from the country are accelerating with economists saying many Malaysians are also sending their money overseas because the falling value of the ringgit.
The reserves slid four times as fast as Indonesia, whose rupiah is the second worst performing currency in the region.
So how do things fare for the local bourse? Local newswire have noted that Malaysia’s forecast of achieving between 4.5 per cent and 5.5 per cent Gross Domestic Product (GDP) growth remains intact despite facing some challenges, said International Trade and Industry Minister Datuk Seri Mustapa Mohamed.
“Yes, we have some challenges, but what is more important is that we recorded a good trade balance although exports and imports are coming down.
“We are still positive with our growth and we will continue to be quite robust,” he told a press conference on the third day of the 47th Asean Economic Ministers (AEM) Meeting and Related Meetings.
OVERALL ECONOMY
Malaysia’s economy appeared to still be in good shape with growth being driven mainly by domestic demand in the last six months.
The Malaysian economy expanded by 4.9 per cent in the second quarter of 2015, bringing the half-year GDP growth to 5.3 per cent.
According to Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Aziz, the Malaysian economy was expected to remain on a steady growth path, with domestic demand continuing to be the key driver of growth.
Looking back at the bourse, the research arm of Affin Hwang Investment Bank Bhd (Affin Hwang Research) noted in an earlier report that it met up with 22 investors.
“We shared with clients our cautious tone on the KLCI for 2H15. Underpinned by stretched valuations and a lack of re-rating catalyst, investors did not disagree.
“Generally, most investors were already underweight Malaysia since late 2014. However, they did not see any re-rating catalyst considering the numerous headwinds. Moreover, investors were concerned that the Ringgit could weaken further,” said the research house.
Affin Hwang Research added that apart from the currency, there were still concerns over the high level of foreign ownership in both the bond and equity markets with the research house concurring that concerns over a bond sell off on the ringgit as well as impact on banks were valid.
Likewise, investors highlighted the ability of Malaysia to navigate itself out of a GDP slowdown given its weaker financial position as oil prices deteriorate.
On the same token, sustainability of development expenditure (DE) was in doubt, given current headwinds and cabinet reshuffle.
“From a sector standpoint, investors were concerned over the telco sector given increased competition with the potential entry of TM’s wireless unit. While we pushed the construction sector, investors seemed to think that the sector is already well owned.
“Plantations did not seem to draw interest although there was some interest in consumer plays following a recovery in spending post the GST impact. Investors that had interest in Malaysia were generally in the export sectors – rubber gloves and technology.
“On a more positive note, we sense that clients were awaiting an opportunity to return to the KLCI once the dust settles. The KLCI’s defensiveness appeared to be appealing given the volatility in North Asian markets. In terms of stock ideas, there was surprisingly a lot of interest in the small cap space,” it said.
One of the basic investing strategies is to ‘follow the money’. In the short-term, the word ‘money’ may mean the flow of market liquidity, while in the longer-term it is almost invariably refers to the underlying corporate earnings.
“We reiterate our assertion that empirical observations between earnings and price are conclusive with regard to the nature of their secular direct relationship. This is despite the ever present ‘noises’ from short-term price volatility which is influenced by market sentiment and other situational issues.
“Hence our assessment on the likely secular trend path of the FBM KLCI is highly dependent on the expected earnings growth performance during the next 12 to 18 months. At this juncture, the consensus 2016 FBM KLCI earnings still points toward a recovery whereby growth is expected to return to a healthy, and more normal, level of 9.01 per cent,” said MIDF Research.
Under the current rather fluid circumstances, it would be difficult to predict the timing of an eventual subsidence of the foreign liquidity outflows which began in earnest since early May this year and further intensified during the past weeks pursuant to the Ringgit selloff.
“We may take cue from the fact that empirical evidences from the immediate past suggest foreigners tended to sell on rumor (Taper Tantrum) but turned buyer/neutral on fact (Actual Taper).
“As the foreigners are now selling on yet another rumor hence, they may similarly turn buyer/neutral upon the fact. On this score, assuming the actual rate liftoff will take place in September, a repeat of past behavior may result in fairly supported equity market during the final quarter of 2015,” it said.
“Pursuant to the ongoing result season, we have thus far raised our forward earnings estimates on only three companies from among the FBM KLCI constituents which have announced their results, but made cuts on five others while keeping another seven unchanged. We thereby put our year-end 2015 FBM KLCI baseline target of 1,800 points under review in view of the bigger tendency towards earnings cuts.”
MIDF Research added that, “We reiterate our assertion that historical observations between earnings and price are conclusive with regard to the nature of their secular direct relationship.
“This is despite the ever present ‘noises’ from short-term price volatility which, as mentioned earlier, is influenced by market sentiment and other situational issues. Hence our assessment on the likely forward secular trend path of the FBM KLCI is highly dependent on the expected earnings growth performance during the next 12 to 18 months.
“At this juncture, the consensus 2016f FBM KLCI earnings still points toward a recovery whereby growth is forecasted to return to a healthy, and more normal, level of circa 9.4 per cent.”
POLITICS
A political scandal surrounding 1MDB which has amassed about RM42 billion in debt in less than five years continues to pressure the Malaysian economy and the KLCI.
Adding to that, there was also the case of the RM2.6 billion which was transferred to the Prime Minister’s account. The Malaysian Anti-corruption Commission’s statement that Najib had received RM2.6 billion from donors and not from 1MDB has failed to assure investors.
Adding to that, Abu Dhabi’s International Petroleum Investment Co may pull out of a plan to help restructure 1MDB US$3.5 billion of debt. The falling value of the ringgit also piles the pressure on the debt.
The recent cabinet reshuffle which saw Tan Sri Muhyiddin Yassin ousted from the Deputy Prime Minister’s seat among other ministers added more negative sentiments on the political situation locally.
Bloomberg has noted that Franklin Templeton Investment is sticking with its investments in the nation’s stocks noting that they are still finding opportunities in the local market but added that foreign outflows may continue to accelerate if the political scandal prevents the ruling government from tackling the issues affecting the economy.
REGIONAL PERFORMANCES
Singapore
The moderate GDP growth was also seen in the rest of the world following rising uncertainty in the financial markets and slower than expected global demand. For instance, Singapore’s economy slowed to 1.8 per cent year on year (y-o-y) in 2Q15 down from 2.8 per cent y-o-y in the first quarter of 2015 due to a contraction in the manufacturing sector, extending a decline from the previous quarter.
The sector was weighed down by output declines in the biomedical manufacturing and transport engineering clusters. As a result, the government slashed the upper end of its growth forecast for 2015 to two per cent to 2.5 per cent from two per cent to four per cent previously.
This signalled a softened outlook even as the government prepares for a general election.
Indonesia
Meanwhile, Indonesia’s economic growth in 2Q15 dropped to 4.7 per cent y-o-y, lower than 2014’s 2Q figure of 5.03 per cent y-o-y and 4.72 per cent y-o-y growth in the first quarter of 2015.
The 2Q15 GDP growth is its slowest since 2009 and Indonesia’s economy grew 4.7 per cent y-o-y during the first half of 2015.
Falling commodity prices and government’s strict regulation on shipments of ore weighed on the mining sector while domestic consumption and foreign investment remained weak, as do exports of Indonesian commodities amid China’s slowdown. For 2015, the government predicts real GDP to grow by five per cent – 5.2 per cent.
South Korea
Similarly, South Korea’s economy expanded at a slower pace in the second quarter of this year to 2.2 per cent y-o-y following a revised 2.5 per cent y-o-y gain in 1Q15.
On a quarterly comparison, South Korea’s economic growth grew by just 0.3 per cent QoQ, the slowest since 1Q09, battered by a deadly virus outbreak, dry weather and poor exports.
The Bank of Korea has lowered its growth forecast to 2.8 per cent for 2015 from an earlier estimate of 3.1 per cent, partly due to the impact of an outbreak of Middle East Respiratory Syndrome (MERS) on the economy.
Thailand
Although Thailand has not announced its 2Q15 GDP yet, Thailand’s Finance Ministry recently cut its 2015 growth forecast for the third time this year due to its shrinking exports, a big obstacle to the trade-dependent country regaining traction.
The ministry now expects the economy to grow three per cent this year, instead of the 3.7 per cent seen three months ago.
A year ago, shortly after the military seized power, the ministry forecast five per cent growth for 2015. Despite falling exports, clearer public investment in the second half and stronger-than-expected growth in tourism will help drive economic growth this year.
Official 2Q15 GDP data will be announced by the state planning agency on August 17, 2015. Thailand’s economy expanded three per cent y-o-y in 1Q15.