CLSA Malaysia Politics Market Strategy

There is no better time to blog about this post. After the plunge of KLCI yesterday, citing election risk, we came across an interesting research report by CLSA. As such, we would like to take this opportunity to share with you.

By CLSA,

An unexpected opposition Pakatan Rakyat (PR) coalition victory in the impending 13th General Election (13GE) would spark a broad sell-off in Ringgit assets. Changes of government are not uncommon in ASEAN. Looking at the experience of Indonesia, Thailand and the Philippines over the last decade, parliamentary control has seen significant shifts and governance has been possible despite the lack of a parliamentary majority. However, Malaysia has never experienced a change in government, meaning any change will come as a shock and with a host of uncertainties.

From an equity and debt market perspective, Malaysia has always enjoyed a political premium for the stability in governance and policy-setting stemming from majority control of parliament. The immediate financial market repercussions can be grouped as follows:

• Equity and bond markets sell-offs are likely as Malaysia's political stability premium is erased, at least temporarily. Domestic corporate, many of which have deep links with the existing government, will be putting big-ticket decisions on hold pending guidance on continuity;
• Ringgit depreciation can be expected in parallel with the sell-off in Malaysian assets by foreign investors. This will pose another drag on broad corporate and foreign investor confidence, especially foreign debt (though positive impact on exporters should not be forgotten).
• And, subsequently draw unfavorable attention from international rating agencies.

Near-term policy expectations

• PR's stated policies are broadly aimed at raising disposable incomes, improving fiscal governance (key revenue generator), and encouraging private investment.
• Higher minimum wage and lower car prices will support consumer spending, while cutting ASEAN-topping corporate tax rate would reassure corporate and investors.
• State oil company Petronas will get more resources to invest in rebuilding reserves.

Medium-long term policy focus

• PR's desire to "rebalance" government contracts and agreements means negative overhangs for state-dependent entities i.e. utilities, concessionaires, construction.
• Banks as large holders of private sector bonds will face negative risk perception.
• Reversing GLC dominance (Iskandar not impacted) will boost private investment and FDI; Khazanah could accelerate local asset disposals, lifting Bursa's free-float.

"Rain or Shine" stock picks

• At the macro level, companies with government-dependent contracts, licenses and concessions will see sustained negative overhang and discounting, while consumer and oil & gas sectors will benefit from rising disposable income and Petronas capex.
• Our "rain or shine" stock picks are expected to do well under either a BN or PR-led government, with earnings underpinned by higher disposable incomes, Petronas association, overseas earnings contribution buffer and a weaker currency.
• A market sell-off would be a prime opportunity to add to positions in Axiata, PGas, UEM Land, IHH, Sapura Kencana, AirAsia and exporters e.g. rubber glove players.

Source: CLSA Asia-Pacific

BNM Further Liberalisation on Forex (Jan 2012)

As part of continuous efforts by Bank Negara Malaysia to enhance competitiveness in the economy and to develop the domestic financial markets, Bank Negara Malaysia wishes to announce the following liberalisation measures, with effect from 31 January 2012:

1. To further spur the domestic foreign exchange market through greater product innovation, licensed onshore banks are permitted to trade foreign currency against another foreign currency with a resident.
2. To further deepen the domestic interest rate derivatives market, a licensed onshore bank is allowed to offer ringgit-denominated interest rate derivatives to a non-bank non-resident.
3. Towards enhancing the asset liability management of residents, flexibility is permitted for a resident to convert their existing ringgit or foreign currency debt obligation into a debt obligation of another foreign currency.

The above measures which are in line with the broad thrust of the Financial Sector Blueprint will contribute towards increasing the liquidity, depth and participation of wider range of players in the domestic financial markets.

Frequently Asked Questions:

1. Can a resident buy and sell foreign currency against another foreign currency for any purpose?
• Yes. With this liberalisation, a resident is allowed to buy and sell foreign currency against another foreign currency for any purpose including for trading. However, such transactions shall only be undertaken with a licensed onshore bank.
2. Does the liberalisation include trading of foreign currency against ringgit?
• No. The liberalisation is only for transactions involving foreign currency against another foreign currency for any purpose.
3. What are the prevailing rules on investment in foreign currency assets?

4. Who are the licensed onshore banks?
• licensed commercial banks in Malaysia;
• licensed Islamic banks in Malaysia; and
• licensed investment banks in Malaysia.
5. What are the prevailing rules on foreign currency credit facilities obtained by a resident?

For further information and enquiries on the measures, members of the public may contact Bank Negara Malaysia via Toll free line : 1 300 88 5465 (BNMTELELINK)

Source: BNM website

The Electrifying TENAGA (Nuclear, USD, Tariff)

Tenaga Nasional Bhd (TNB), the national power producer of Malaysia, would embark on nuclear power in the next few years. Given the sensitivity of such issue, Malaysia government has again hinted that there are plans to construct nuclear power plants in the country to fulfill boost up the electricity capacity.

Example of Nuclear Power Plant

According to theStar recently, Energy, Green Technology and Water Minister Datuk Seri Peter Chin said Malaysia plans to build two nuclear power plants with a capacity of 1,000 megawatts (MW) each and commencement of operations in 2021-2022. This is part of the country's overall long-term plan to balance its electricity generation mix.

The two nuclear plants would represent 9% of peninsular Malaysia's existing power generation capacity of 21,817 MW. This is necessary for the country given that the peninsula's power reserve margin will drop from 44% currently to below 20% by 2016 while the 1,600MW Bakun undersea cable project has been discontinued.

While nuclear power is a long-term catalyst, there is short and medium-term positive news for Tenaga.

Short-term:

Generally, weakening of USD would improve the balance sheet of Tenaga as most of its debt are denominated in USD. With USD falling from 3.14 to 3.09 for the past two weeks against RM, Tenaga stands to gain from lower financing cost/interest incurred.

Medium-term:

With the escalating coal prices which put pressure on the bottom line of Tenaga, government has agreed to grant Tenaga to hike electricity tariff very soon. Speculations are rife up saying the hike could materialized as early as 1st January 2011, and the percentage was up to 40%.

Although Finance Malaysia expecting a tariff hike in second quarter next year, it should not be more than 20%. This is a very cost-sensitive issue given the upcoming general election said to be after Chinese New Year.

Brighter outlook for Glove Sector?

Yesterday, Adventa (Malaysia's 5th largest glove manufacturer) surprisingly reported 4Q10 net profit of RM11.8 million, up 50.8% year-on-year. According to RHB research, the results were above expectations, mainly because of of a deferred tax write back of RM5.6 million. Excluding the differed tax write back, FY10 net profit would have been RM30.2 million.

Advent's range of products

However, profit before tax was lower due to a time lag as only about 70%-80% of the higher costs incurred as a result of rising latex prices and the weakening of the USD against MYR were passed on to customers --- OSK research.

To sweetened the announcement, Adventa also declared a final tax-exempt dividend of 7 sen, which translates into a net payout of 30% and net yield of 3.6%.

Indicating a revival of Glove counters?

As all of the glove counters are in the red this year, experiencing a whopping 30%-40% drops, Adventa's result sure will catch the eyes of investors again. But, Finance Malaysia cautions about it, because Adventa's business model is a little bit different from the other glove manufacturer. Adventa was in a niche position as a manufacturer of surgical gloves, in which the demand is more resilient. Even if Adventa raised the price of its products, it was unlikely to dampened the demand of gloves.

Finance Malaysia do not think that yesterday's result from Adventa is a turn-around indication for other glove manufacturers. And, if the current scenario such as higher latex prices and weakening USD persists, all the glove makers will continue to suffer of margin squeeze.

Due to different assumptions and calculations, OSK raised Adventa's fair value to RM3.80, while RHB lowered their fair value to RM2.21.

Why China raise interest rate? And, what's the effect?

Yesterday, China surprisingly raised its interest rate by 0.25% as follows:

- 1 year lending rate from 5.31% to 5.56%

- 1 year deposit rate from 2.25% to 2.50%

Why China raise interest rate?

1. To cool down the over-heating property sector.

2. Combat inflation

3. Low liquidity in the banking system

While inflation was hovering around 3.5% currently, even though the deposit rate has been raised, the net real interest rate is still in negative territory (3.5% - 2.5% = -1.0%). This is one of the main reason why Chinese were going all out to invests, especially in real-estate, due to its low yield if sitting in the bank (even lower than Malaysia).

However, China would be facing another problem...

Raising interest rate would attract capital inflows, which could dampen the purpose of containing inflation. Foreign investors view Chinese renmimbi as undervalue, mainly due to interventions by Chinese government. The latest news could ignite a fresh round of thoughts, worsening the current situation, pushing renmimbi higher and faster.

In fact, China should target it's main problem specifically - real estate. Inflation there is mainly caused by high flying properties prices. Hence, measure such as property gain tax should be introduced first, before raising interest rate, to avoid further attracting inflow of hot-money.

Affecting Malaysia?

Given that China is one of the largest trade partner with us, Malaysia could see a surge in capital inflow also. In fact, the whole region will experience the same fate of stronger currency, making our export to western countries more expensive. Anyway, I believe that we can offset the negative effect with China being the largest commodities / resources consumer, which supplied by Asian countries.

Malaysia to curb capital inflows?

Due to weakening USD and record low-interest rate in the US, Europe and Japan, emerging markets have been a popular spot for excessive liquidity to park their money. Main reasons being:

1. Emerging markets are the fastest growing economies currently
2. Emerging countries are having higher interest rate
3. Banking system of emerging countries are stronger (safer)

While develop countries are facing a currency downfalls, emerging countries are experiencing continuous inflow of hot money. This in turn causing a chaotic in currency exchange market, where emerging countries' currencies are hitting years high against developed nations. The imbalance forex market prompt central banks around the world to act or to curb any excessive flows of money which could jeopardised a particular countries, like 1997 Asian financial crisis.

In the latest developments on this hot topic, Thailand announced a 15% withholding tax on interests and capital gains on Thai bonds. In the meantime, South Korea, Taiwan, and Indonesia has been using "quasi-capital" control, in which encouraging outflows of hot money.

The billion dollar question... Will Malaysia follow?

Ringgit is the 2nd BEST performing currency in Asia, behind Thai Bath. I think when Bank Negara started its "triple" hike in overnight policy rate (OPR) this year, they already foresee the side effect of capital inflows. Due to large chunk of it went to Malaysia Government Securities (MGS), coupled with strong and effective domestic financial systems, Malaysia can safely mitigate the effect currently. However, we must act soon because I expect more hot money would pour in from countries which had imposed capital controls moving forward. We can expect a much stronger Ringgit soon.

Why Malaysian market keeps going up?

Recently, I personally have a chance to met up with some businessman from different industries.

When we chat about business, they said "very competitive la".

When we chat about economy, they said "still very uncertain eh".

When we chat about KL market, they said "why keeps going up ahhhh?".

While newspaper and media are reporting a slew of  news regarding Euro debts problems, US high unemployment, Japanese deflation, and China's scary property bubbles, our market charging ahead unobstructed. In contrast, Ringgit is heading to a fresh 13-year high against USD, KLCI is trying to out-beat its highest ever level, surpassing the pre-crisis level now. Although our economy was not as good as pre-crisis, our KLCI did. Why?

Malaysia to gain from world's liquidity...

Taking a macro-economic view, this is all due to the liquidity that the world governments created to rejuvenate their economies out from the 2008 recession. Actually, we are one of the by-products of too much liquidity that was created. Just take yourself as an example.

Would you invest your money to get a better return compare to fixed deposit now?

What would be your investment then?

The answer is quiet clear-cut, YES, I will invest into share market, mutual funds, or property. Definitely not fixed deposit. Right?

Remember, US and other developed countries with great liquidity are having a near record low interest rate (almost zero). Ultimately, it encourages or forced people to invest and spend, instead of "eating" interest in banks.

Then, they channel their money into those high growth countries/region, the one which came out earliest from recession. 2009 we have Australia, New Zealand, and BRIC (Brazil, Russia, India, China). 2010 we have south-east Asian countries, where Malaysia is one of them together with Indonesia.

It's not purely based on our economy, but, liquidity from other countries.

* Hint: What are the most popular mutual funds in the market now? Then, you will know the answer...

Why Ringgit is so strong now?

Recently, many of my friends asking me why Ringgit suddenly is rising so fast in value?

Well, this is not a bad question though for Malaysians. In contrast, for those who working overseas, and converting to Ringgit regularly, would become poorer as a result. In fact, many Malaysians working in Singapore especially, might think that RM is generally weakening against SGD over the long-term. It's TRUE if you are saying since "Dot-Com" burst. 

Could this be a turning point now?

From the graph above, it shows clearly that the trend of decreasing value of SGD against RM. Reasons being that optimism of Malayisan economy is going to grow faster than many predicted. This has whetted foreign investors' appetite for local assets, including stocks and bonds.

World Bank recently raised its forecast for Malaysian economy to grow at a faster rate of 5.7% this year, compared with its earlier forecast of 4.1% made in November. As a result, local equity and bond markets are experiencing strong flowing-in of foreign money, spurred by strong growth prospects and favourable government policy moves. Malaysia goverment securities (MGS) is one of the ringgit-denominated asset which could give foreign funds liking to deposit, given its huge liquidity.

Anyway, the main reason behind the strengthening of Ringgit started when Bank Negara Malaysia (BNM) raised overnight policy rate (OPR) from 2% to 2.25%. And, many analyst are expecting another hike on May 13 meeting. The recent rate increase and the prospects for further hikes are supportive of the ringgit's further rise.

In Asia Pacific region, Bank Negara was among the first central banks to raise key interest rates, after Vietnam and Australia, as policymakers expect economic growth to strengthen further, or to prevent another asset bubble from being inflated. Consequently, ringgit is one of the best performing currency year-to-date.

Hint: Ringgit will strengthen further against USD, and SGD somemore...