Can the momentum on Bursa be sustained?
IS BURSA Malaysia poised for greater heights despite worries of a worsening US-China trade war and the tumbling of the lira and ruble?
As foreign funds start pouring back into Malaysian equities, investors are reminded of the cyclical nature of these fund movements.
Taking a breather from the ongoing trade fears, market players note that the US has yet to slap tariffs on an additional US$200bil of Chinese imports. To a certain extent, China’s stimulus measures may help to offset a weakening economy caused by US tariffs but there are worries about growth next year.
The fresh tumbling of the Turkish lira and Russian ruble, caused by US sanctions, has affected some emerging market (EM) currencies but Malaysia may be strong enough to withstand the waves. The sentiment may negative for EM currencies with the plunge in the two currencies linked to specific political issues with the US.
It should thus not have a wide contagion effect and some Asian countries may still benefit from foreign funds flows.
“They are in a better fiscal and current account positions and they also have banks that are wellcapitalised,’’ said Danny Wong, the CEO of Areca Capital.
On Bursa, foreign funds have just turned net buyers; the upward momentum has just begun.
Thequestionishowsustainedcanthisuptrend be, as foreign funds usually move in a cyclical pattern but Bursa is generally expected to climb further and not be affected by the plunge in the lira and ruble.
“Foreign funds are likely to remain on Bursa, for at least a month,’’ said Pong Teng Siew, the head of research of InterPacific Securities.
In view of the fact that Bursa is still within the growth engine of Asia and the EMs, its medium term prospects are still positive. “Malaysia is on the radar, based on its political and economic reform theme,’’ said Wong.
Favourable factors include a relatively low ringgit/dollar exchange rate and low foreign holdings; Malaysia is also more neutral on geopolitics and global trade policy. The China stimulus, which had come into rescue in previous hard times, may face limitations this time and may thus not be very powerful.
“China can adopt a more proactive fiscal poli- cy along with a less aggressive monetary policy to keep growth within the preferred range,’’ said Lee Heng Guie, the executive director of Socio Economic Research Center.
China now plans to expedite state government spending of 1.35 trillion yuan (about US$199bil) on infrastructure. Fiscal measures to support exporters and boost domestic demand may also be used. It is noted that China has huge foreign reserves of US$3 trillion. However, in using fiscal policy, the fear is that spending on infrastructure may slow down sharply again as debt builds up, while the Chinese government continues to crack down on debt.
“(Actually), the right way for China to respond to the trade war may be to keep monetary policy loose for as long as possible to boost hopes of domestic reflation,’’ said Anthony Dass, the chief economist/head of AmBank research.
But the risk of easing monetary policy aggressively is that it will raise doubts on China’s commitment to reduce its debt, which has ballooned over the last 15 years. In 2016 alone, Chinese banks extended a record 12.65 trillion yuan (about US$1.88 trillion) in loans as part of a credit-fuelled stimulus to meet China’s growth target.
These stimulus measures will cushion, but not negate, the effects of a full-blown trade war.
China’s economy may be set for a bumpy ride in the second half of this year, while its growth risks being blown offcourse next year. “The impact of the ongoing trade tensions on external and domestic demand in the second half of this year, is of concern,’’ said Dass. This will be via direct and indirect effects not just on manufacturing, business and investment sentiment, but also on services such as logistics, wholesale trade and trade finance.
AmBank’s forecast of 6.2% growth for the Chinese economy next year risks being downgraded to 5.55.8%; its forecast of a 6.5% growth for this year, in line with official projections, is less at risk.
Also of concern is a potentially weaker yuan, as China prepares for a further escalation of the trade war. “Past experience shows the ringgit/dollar exchange rate to be highly correlated (an 87% correlation over the past five years) with the yuan/dollar exchange rate,” said Nor Zahidi Alias, the chief economist of Malaysian Rating Corp. A prolonged weakness in the yuan will likely exert downward pressure on the ringgit.