Brexit’s impact on Malaysians
Investors dump risky assets to go into safe-haven ones
THE immediate impact to Malaysia from UK leaving the European Union (EU) will be a weaker ringgit, which fell steadily against the US dollar at a pace last seen in the Asian financial crisis of 1997/1998 by midday yesterday as investors dumped riskier assets in emerging markets for so-called safe-haven assets such as US treasuries, Japanese government bonds, German bunds and gold.
Asian financial markets reacted rapidly when realisation set in that the “Leave” vote was leading with Tokyo’s Nikkei 225 and Topix benchmark indices plunging. Similarly, the FBM KLCI had fallen 22.66 points by the midday break. While the local bourse recovered most of the losses from earlier in the day, the intraday price movements is an indicator of what may come in the forseeable future.
The pound sterling had strengthened in the days before the June 23 referendum reflecting the hopeful albeit cautious mood that Brits will vote to stay in the EU. Emerging market equities and currencies also saw gains as investors took a riskon stance. These gains have gone up in smoke as investors now take a risk-off stance.
Analysts had expected a close fight because the odds for Brexit, as the move to get Britain out of the EU is better known, had fallen somewhat following the murder of Labour Party member of parliament Jo Cox on June 16 with some polls showing that the “Remain” campaign had a slight edge.
The US dollar gained by more than 10% against the pound sterling by noon, Asian markets were mostly in the red at close while European markets opened in the red, with Paris’ benchmark Cac 40 dropping more than 7% in early trade. Investors have piled into safe-haven investments, with spot gold prices soaring and US Treasury 10-year yields falling to near fouryear lows at one point as prices rose. Bond prices and yields have an inverse relationship.
Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias says the whole issue boils down to uncertainties that will have impact on business decisions and the real economy especially in Europe. “Brexit will cause a knee jerk reaction to the financial markets – currencies being the most vulnerable. The volatility in equities and bonds cannot be underestimated in the short term but will eventually subside when a clearer picture emerges,” he tells StarBizweek.
Zahidi says the impact on Asian economies will be minimal, based on trade volumes. “Asia exports less than 1% to Britain, while Malaysia’s exports and imports to Britain are roughly 1% of total trade,” he adds.
For now, the pound sterling has weakened against the ringgit but the cross-rate will be up for a lot of volatile trading. Analysts have pointed out before the referendum that the ringgit and the rupiah were the most vulnerable Asean currencies to swings associated to the uncertainties surrounding the aftermath of Brexit.
The direction of commodity prices and crude oil in particular, will be key to the ringgit’s performance. The global crude oil benchmark, Brent, declined by more than 4% in the late morning as British media confirmed that Brexit was imminent. There is every indication that crude oil prices will continue to be volatile because demand may be crimped by Brexit uncertainties stemming from recessions in Britain and the EU, potentially slower US economic growth and the unresolved Chinese debt crisis.
“Although Britain accounts for only 2.5% of global gross domestic product, the indirect impact of Brexit on global growth as a result of uncertainties emanating from it cannot be underestimated. Capital flows will also be affected as investors increasingly seek safe haven assets, leading to further strengthening of the greenback and yen in the near term,” Zahidi says.
Indeed, financial markets are now contending with liquidity problems arising from investors selling riskier assets and buying into safe-haven ones. A Reuters report earlier in the week showed that the options to sell pound sterling far outstripped options to buy it in the run-up to the referendum, making it difficult to price the currency.
These illiquid conditions will also cause wild swings in asset prices, especially for riskier emerging-market assets, which are likely in for a rollercoaster ride because investors are now in risk-off mode, that is, they are now limiting their exposure to such assets.
However, Securities Commission chairman Tan Sri Ranjit Ajit Singh says Malaysia’s capital markets have the the breadth and depth to manage the impact of any volatility. He noted that market conditions have adjusted in an orderly manner as in the past. “Our view is that the market will adjust to reach an equilibrium, the long term implication has not been fully reflected yet but as far as the Malaysian market is concerned, we see orderly conditions prevailing,” Ranjit says.
He adds that market players are well capitalised and are able to absorb any reaction that may occur. “So far, market conditions have been manageable in terms of the impact. We are keeping a close watch on the implications to the financial market, industry and economy. What is clear is that we must be able to ensure and demonstrate our commitment towards open trade and the advantages it provides to Malaysia and Asean. These will have implications for our markets,” Ranjit says.
Meanwhile, Citigroup Inc analysts advised investors in a report following the Brexit results to not invest in emerging markets despite the weakness in these assets because of the limited impact on fundamentals, investors already positioned in the defensive and in anticipation of more monetary policy support especially from the US Federal Reserve, the European Central Bank and the Bank of Japan.
“Elsewhere in Asia, the immediate policy response is likely to be for central banks to step into forex
markets to provide liquidity for the likely strong demand for US dollar,” they say, adding that based on past experience, Bank Negara will be reluctant to intervene.
They point out that short-term forex managers’ relatively long exposure to the ringgit indicates that the currency “may suffer the most extreme move in the short run”. They believe that the won and the rupiah are also likely to underperform despite support from their central banks.
Morgan Stanley Research analysts say that Brexit will not trigger a global recession but economic growth will likely slow down to 3.1% from 3.4% on a base case scenario “due mainly to the impact on European growth and global financial conditions tightening”.
They also believe that the likelihood of central-bank intervention in the forex market has risen and indicate that the yen will strengthen to between 90 and 95 to the US dollar. The yen strengthened to as high as 99.02 in intraday trading yesterday.
The analysts say within Morgan Stanley’s Asia Pacific excluding Japan/emerging-market universe, the most preferred countries are India and South Korea. “Our least preferred countries are Australia, South Africa, Singapore,” they say. On a sectoral basis, they prefer staples, pharmaceuticals and IT and least prefer energy, materials and industrials.
“Within Japan, we would continue to prefer domestics over exporters, and we maintain our strong preference for real-estate investment trust stocks,” they add.
On the other hand, Bloomberg reported that Macquarie Securities’ Asian strategy head Viktor Shvets says Brexit is a positive for emerging markets, especially those economies underpinned by commodities such as Indonesia and Malaysia as a weaker greenback and stronger yen means better commodity prices and higher global prices, which will be good for emerging markets.
Macquarie has an underweight on Indonesia, Singapore, Thailand, Malaysia and Hong Kong, overweight on India, Philippines, China and Taiwan. Shvets believes the Fed will have less scope to tighten monetary policy, that is, raise interest rates, due to Brexit, deflationary pressure in Japan and the slowdown in China.