Keeping an eye on export competitiveness

WITH a higher ringgit and increasing costs of gas and electricity, will export-oriented industries, which have been doing well lately, be hit?

“Sustained strong demand is crucial to maintain the good prospects of export companies,’’ said Lee Heng Guie, executive director, Socio Economic Research Centre.

An impact from the strengthening ringgit on sales denominated in US dollars may be offset by lower costs of imported raw materials.

“Export-oriented sectors such as rubber products, semiconductor and palm oil will be likely impacted by the strengthening ringgit as their sales are in US dollars.

“This will, hence, eat into their profit margins. But lower costs of raw materials will help to offset that negative impact,’’ said Lee.

“Malaysia’s export competitiveness remains healthy, thanks to the weak ringgit buffer built up from the depreciation in the past years,’’ said Vincent Khoo, head of research, UOBKayhian.

“The appreciation of the ringgit just took off in a serious way only last month. We will have to wait and watch; the impact will filter in after a while.

“Overly rapid forex moves are always disruptive, whether up or down,’’ said Pong Teng Siew, head of research, Inter-Pacific Securities.

But for crude palm oil (CPO) prices, the strengthening ringgit seems to have had some impact. “CPO prices are unable to climb this year in the fourth quarter, a seasonally strong quarter for CPO,’’ said Pong.

The first quarter of next year may be potentially good for equities but why is a trading rather than investment approach advocated?

“The outlook for equities, in general, will be tougher with less room for multiple expansion as valuation is fair. This means there will be more reliance on earnings growth, hence portfolio allocation to sectors with higher potential of earnings surprises.

“Sectors that fit into this theme include banks where earnings growth is positive in a gradual rate hike environment, consumer staples for improving consumer sentiment and defensive qualities, and upstream oil players to ride on rising oil prices,’’ said Thomas Yong, CEO, Fortress capital.

“For the first half, the focus is likely to rotate back to the large caps. The dismal earnings season for mid to small caps in the third quarter – due to high input costs arising from, among other factors, a weak ringgit – will likely dwell on the minds of investors for a while,’’ said Pong.

After the excessively high expectations piled on them, these mid to small caps are now said to be exposed like the “emperor without clothes”.

Is the technology rally of 2017 over?

“Technology was the runaway leader of the pack for the rally in the first half of 2017. While orders are still very strong for the industry, the spike in valuations has left them vulnerable to jittery investors who now hold them at high prices, and have little buffer for misjudgements.

“Institutions with substantial unrealised investments wishing to lock in on profits may discover such relatively less liquid stocks are difficult to sell without causing undue volatility,’’ said Pong.

With at least US$323bil in infrastructure spending in the pipeline in South-East Asia and potentially more expected over the next few years, 2018 could well shape up as the year of builders’ stocks, said Bloomberg.

“Construction stocks may provide trading opportunities. Costs are often opaque; uncertainties such as weather and workers’ issues can cause expensive delays.

“Landing lumpy jobs is not a sure bet of profitability. An overly successful tender book can be followed by a slow patch, when earnings can quickly tail off.

“Such uncertainties may lead many investors to lock in gains quickly,’’ said Pong.

But unlike before, Malaysia’s infrastructure spending seems to be expanding further.

“This may mean that opportunities for medium term investing are better now.

“However, one needs to take a closer look at the sub-sector that the construction company falls under, as prospects are uneven for the residential and non-residential sectors due to pockets of over-supply building up,’’ said Pong.

“Next year, the expected announcement of the tender results for the High-Speed Rail and Bandar Malaysia are likely to provide strong catalysts to the construction sector.

“The large overhang in commercial and high-end residential development projects is expected to dampen the growth of this sector in the years ahead. This follows the freeze order on the approval of new projects above RM1mil for residential and non-residential projects,’’ said Lee.

So far, the construction sector has been the prime beneficiary of the ongoing implementation of major civil engineering projects such as in public transportation, ports, the Pan Borneo Highway and construction of commercial, retail and housing development projects.

Columnist Yap Leng Kuen sees that maintaining profit margins is a challenge ahead.

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