BNM hike OPR amid strong economy growth

Malaysia’s Central Bank, Bank Negara Malaysia raised the Overnight Policy Rate (OPR) by 25 basis points for the first time in three and half years. The rate hike decision was out of our expectation as we previously foresee the rate hike decision will only come in after the second quarter. The latest floor and ceiling rates of the corridor for the OPR are raised to three to 3.50 per cent respectively.

BNM believes that the growth momentum of the local economy is likely to sustain into 2018, underpinned by synchronised global growth which would boost the local trade growth and the recovering domestic demand, a result of favourable income and labour market condition. As such, BNM opines that the rate hike is appropriate in order to prevent the build-up of risks that could arise from interest rates being too low for a prolonged period of time.

Having said that, we believe that BNM might not further tighten the monetary policy as the intention is to normalise the interest rate and any further hikes would weigh on the economy growth moving forward. As such, we do not foresee any significant impact from the OPR hike.

On top of that, the rather hawkish monetary stance as well as the FEA rulings coupled with strong exports continue to push ringgit to a one and half year high level. Hence, we see a brighter prospect for the Auto, Aviation and the Private Healthcare sector which will benefit from a stronger ringgit by having lower operating cost. However, the exporting sector is likely to take a hit on the strengthening ringgit due to the diminishing competitiveness. As such, we believe that the outperformance gap between small cap and the big cap segment is likely to narrow as most of the mid to small cap companies fall within the exporting category.

Although the strengthening ringgit is likely to hurt the exporting counters, we believe that the synchronised global growth is likely to boost the external demand, hence, offset the impact of the strong ringgit.

The rate hike decision is likely to hurt the REITs players in term of higher borrowing costs that might dampen the earnings of these players. However, the impact would vary according to the debts structure of the respective REITs (variable loan vs fixed rate loan).

All in all, we continue to be positive on the local equity market and economic growth despite the current rate hike decision. After stepping into 2018, we believe that the bigger cap companies are likely outperform the smaller cap companies after considering the impact of a stronger ringgit and the continuing foreign inflow that is likely to further support the bigger name companies.

 

To read more about activities in the market, log on to www.fundsupermart.com

What do you think of this story?
  • Angry (100%)
  • Sad (0%)
  • Nothing (0%)
  • Interesting (0%)
  • Great (0%)

 

Affiliates

 

Supplement Downloads

Member of