All eyes on revenue in any next downgrade?

AFTER a round of earnings downgrades in which Malaysia is said to have overtaken South Korea, can there be another round of downgrade projections?

Cost pressures had mostly led to those earnings adjustments in the last quarter but all eyes are on the revenue side for the next two to three quarters.

As projects get prioritised, delayed or downsized, the revenue of construction and building materials companies are under watch.

And as the brewing trade war steps up on a global scale, and affects growth, manufacturing and consumer spending could get hit.

Mercedes-Benz maker Daimler, which makes Mercedes sport-utility vehicles in the United States and ships them to China, has issued a profit warning as Beijing announced a 25% import tariff on US$50bil of US products, including cars.

Malaysia, being part of the supply chain to manufacturers in China, will likely be affected.

“At this point, it is difficult to gauge how much would be affected but for sure, we are part of the global technology supply chain that will be disrupted,” said Pong Teng Siew, head of research, Inter Pacific Securities.

“In the near term, no major downgrades are expected. There are a lot of changes from the new government and we are waiting for more clarity.

“Companies manage as they go along; if there is no clarity locally and globally, the concern is that revenue may get hit in the next few quarters,” said Ching Weng Jin, head of research, Public Investment Bank.

“My FBM KLCI target is 1,530, assuming zero earnings growth; if earnings growth is negative, it will get even lower to 1,400 plus,” said Pong.

Policy uncertainties is a major drag on stock prices.

“Malaysia had stood out as a lower beta (lower volatility) emerging market (EM) in the region; recent policy uncertainties had, however, raised risk premiums that were not priced in before.

“Hence, the price discovery process (act of determining the price of a stock) may be extended,” said Thomas Yong, CEO, Fortress Capital.

To what extent can Malaysia tolerate a weak ringgit, there being a view that surplus countries like Thailand, Taiwan, South Korea and to a lesser extent, Malaysia, may not mind seeing their currencies weaken, as it helps exports.

“Bank Negara is expected to tolerate a somewhat weak ringgit against the US dollar; should domestic economic conditions get stronger, investors must prepare for a rise in rates,” said Lee Heng Guie, executive director, Socio Economic Research Centre.

So far, the ringgit has been quite steady.

“The momentum (of depreciation of EM currencies) seems to be building up. If it reaches boiling point without affecting us yet, then we might just be saved from the worst.

“A contagion effect can build up, so we can get pulled into the maelstrom,” said Pong.

The speed of the depreciation will be key as a “shock and big devaluation” will be very damaging.

The pressure on EMs is likely to keep ratcheting higher. “There is no sign of pressures easing at this point. Someone dumped a large sum in EM bonds exchange traded funds last week in the US,” noted Pong.

The current trade war, in which India and Turkey have joined in retaliatory moves, still has limited impact on growth but top central bankers are concerned over damage to confidence and economic outlook.

Could that confuse central bank policies?

Central banks would have to calibrate policies to support growth counterbalanced by the need to fend off pressure from capital reversals which so far, had been relatively contained, said Lee.

It will be a dilemna for Asian central banks.

“Monetary policy is geared towards domestic conditions that would be modestly strong and warrant a slightly accommodative interest rate.

“Keeping rates unchanged amidst rising US rates will lead to a sharply weaker currency, causing inflation and loss of purchasing power,” said Pong.

Raising rates to firm up the currency may not work either, as in the case of the Turkish lira. “It may even kill the economy,’’ said Pong.

Foreign holdings of Malaysian Government Securities amount to RM200bil. “If the US raises its rates to 3.25%, which will be on par with our overnight policy rate, would foreigners still be holding our papers?

“This is the perfect storm,” said Ching. The combination of US tightening, withdrawal of liquidity and trade uncertainty will drastically aggravate markets and economies.

“Hopefully, these tariffs do not get enacted into laws,” said Ching.

In further tit-for-tat, the US has threatened to impose tariffs on cars from Europe which has hit US products with counter tariffs, and vowed to retaliate on any US auto tariff.

Columnist Yap Leng Kuen notes the unenviable position of being in the eye of the storm.