Big disconnect between the ringgit and Bursa
THE ringgit is among the best-performing currencies among emerging markets so far this year. However, Bursa Malaysia is an underperformer, up by only 7% year-to-date.
In fact, over the last six months, Bursa is among the worst performers – down by 1.9% – when compared to other stock markets globally.
The ringgit, in contrast, is up by almost 10% against the US dollar so far this year. Among the better-known currencies, only the South Korean won and the Thai baht have done better than the ringgit in Asia so far.
In the 1990s, a stronger ringgit would inevitably mean a better stock market. But this correlation has shifted.
One of the reasons is Malaysia’s deep bond market, which offers yields of between 3.6% and 3.97% for papers with a tenure of between five and 10 years. It offers foreigners a place to put their money in instead of the stock market.
The rise of the ringgit is due to several reasons – from exporters repatriating their profits to a stronger Malaysian economy and a general weakening in the US dollar.
Firstly, the ringgit against the US dollar started the year from a low base. It was at RM4.49 to the US dollar on Jan 4 this year. It has fallen so much since June 2014, when it was at RM3.21 against the dollar.
The ringgit’s slide began in mid-2014 when oil prices started their downtrend. It hit its worst point in November 2016 when Donald Trump won the US presidential election, a high point for the dollar.
Trump’s economic policies that slanted towards a stronger US domestic economy buoyed the dollar, at the expense of the rest of the world.
However, since the first quarter of this year, there have been doubts whether Trump will be able to see his economic policies through. The dollar index has been on a downtrend from its high of 103.3 on Dec 28 last year. It is now at 93.49, a decline of more than 9%.
Even a series of interest rate hikes in the United States has not convinced the markets that the dollar would strengthen.
Secondly, the Malaysian economy is doing well, with economic growth above expectations.
Exporters have reaped the benefits of the weak ringgit, pushing up trade figures. Malaysia’s current account surplus is growing, an indication that the country will not suffer a twin deficit.
The Federal Government fiscal deficit is also well on course to reduce gradually in the next few years, something that the international rating agencies want to see happen, irrespective of the political climate.
Next year, the Federal Government deficit is projected to hit 2.8%.
More stable crude oil prices are another factor working in favour of the ringgit. Crude was at an average of US$29 per barrel in January 2016. Now, it is averaging closer to US$59 per barrel, way above the Malaysian budget estimate of US$52 per barrel.
Apart from a stable crude, a stable ringgit also helps shore up its demand.
In November last year, Bank Negara initiated measures that helped curtail the offshore ringgit market that is settled in US dollars. Bank Negara told local banks that they would be hauled up if any of their transactions were related to settlements in the offshore ringgit market called the non-deliverable forward (NDF).
Bank Negara came under criticism for its interference in the NDF market. However, its measures reduced the volatility of the ringgit, which made it a favoured currency in the carry trade.
The carry trade is funds borrowing in currencies that carry a low interest rate such as the Japanese yen or the euro and investing in currencies that fetch a higher yield, such as the Brazilian real.
The Malaysian 10-year debt papers fetch a yield of close to 4%, while the five-year papers offer a yield of 3.6%.
Foreigners borrowing at less than 1% can invest in the debt papers and make a decent gain, apart from enjoying the appreciation of the ringgit.
Another measure that the central bank took was to compel exporters to convert 75% of their proceeds into the ringgit, something that stirred demand for the local currency. Previously, they had held most of it in US dollars.
The Malaysian stock market is up by about 7% year-to-date. Other markets such as the Hang Seng in Hong Kong is up by more than 30%. The US market is up by an average of 15%.
The markets that have performed worse than Bursa are the China stock exchanges in Shenzhen and Shanghai.
There are probably two factors bogging down Bursa.
For the stock market to enjoy the gains in the rise of the ringgit, value has to start emerging in companies. Apart from value, Bursa seems to be suffering from a political overhang.
A conducive investment climate requires political certainties. With the general election around the corner, not many would want to put money into the stock market for the longer term.
Until politics is taken out of the equation, there will be a disconnect between the rise of the ringgit and the stock market.