Ringgit uptrend intact

Research houses: Bank Negara policies and lifting of uncertainties to drive currency

PETALING JAYA: Research houses are not expecting major changes to the direction of the ringgit and political scenario post the general election.

HSBC, in its Global Research report ahead of the general election, sees Barisan winning the most number of seats.

It believes such a scenario will not alter the country’s credit rating by the rating agencies.

The ringgit’s performance, which strengthened ahead of the last two elections in 2008 and 2013, after GE14 would continue to be driven by Bank Negara’s policies.

“Our base case is for no major changes in policy or regulations and so US dollar-ringgit will fall towards RM3.70 by year-end because of the mandatory conversion by exporters amid gradual foreign exchange reserve accumulation by Bank Negara.

“A pick-up in foreign direct investment and portfolio inflows from foreign investors relieved by the prospect of policy continuity under Barisan’s governance would certainly help too,” it said.

HSBC was bullish on government bonds and expected further gains to materialise once the general election is over, assuming Barisan returns to power.

“In the event that the opposition coalition wins, we will be monitoring closely to see if it follows through with some of the pledges listed in its election manifesto, namely to remove the goods and services tax as well as to reintroduce subsidised fuel for selected consumer groups within the first 100 days of office,” it said.

“If the pledges are implemented, we will have to determine the potential size of increase in the fiscal deficit and government bond issuance.”

Maybank Investment Bank, in its report ahead of the general election, has a baseline scenario of a Barisan win.

Its best case scenario is Barisan winning a two-thirds majority in Parliament.

It expected construction stocks to rally should the baseline scenario be met.

Such stocks saw profit-taking activity ahead of the general election and the rally would be on the back of major infrastructure projects continuing, especially those related to the ECRL, MRT3 and the KL-Singapore high speed rail.

In its best case scenario where Barisan wins the two-thirds majority, the research house expects the KLCI to spike up and form a short rally.

“While the FBM KLCI (+2.2% year-to-date) has partially priced in a status quo GE14 outcome, it has yet to price in a bigger win by Barisan, in our view.

“The market’s upside would then be premised on continuity in macro-economic policies and external trade/relations which would be supportive of sustainable economic growth.

“Also, with a stronger mandate under GE14, the expectations are for positive reforms to continue.

“This optimism would be supported by corporate earnings which are expected grow for the second year, after three years of stagnating (forecast +8.3% in 2018 vs +7.3% in 2017 for our research universe –75% of market cap of the Malaysian bourse),” said Maybank.

Under such an outcome, it expected banks, which are direct proxy of economic growth, to drive the big-caps rally.

It expected oil and gas stocks to rally especially with crude oil prices sustaining above US$60 a barrel.

“We also expect property stocks, whose valuations are deeply discounted to their RNAVs, to stage a short break-out.

“That said, the issues surrounding this sector are structural in nature, with oversupply continuing to build, especially in the commercial office space and retail segments; we would be cautious, beyond a trade.

“In addition, similar to our base-line scenario, we expect the mid-cap stocks to stage a relief rally under this GE14 best-case scenario,” said Maybank.