On a cautious mode

In a Asia-Pacific equity research report, Credit Suisse opines that Asean is now more growth-sensitive and less rates-sensitive than before. The research unit notes that foreign ownership of equities has fallen, and the foreign presence in local bond markets is down substantially in the two markets (Indonesia and Malaysia) with the biggest dependence on foreign flows.

AGAINST the backdrop of global equity markets spooked by the threat of the US Federal Reserve (Fed) hiking interest rates and tapering asset purchases, Credit Suisse is expecting a vastly different outcome for Asean markets in this hiking cycle than during the 2013 taper tantrum, when eight years of underperformance set in.

In a Asia-Pacific equity research report, Credit Suisse opines that Asean is now more growth-sensitive and less rates-sensitive than before.

The research unit notes that foreign ownership of equities has fallen, and the foreign presence in local bond markets is down substantially in the two markets (Indonesia and Malaysia) with the biggest dependence on foreign flows.

“In Malaysia, foreign ownership of local bonds is down from 50% in May 2013 to 40% now, while in Indonesia, foreign ownership of bonds has fallen from 33% at the end of 2012 to 20% now,” says Credit Suisse.

It also points out that contagion from Indonesia was behind much of the 2013 Asean tumble and it suffered from a weak current account, high inflation and heavy dependence on foreign capital.

“Inflation now, however, is in Goldilocks territory, while the current account is robustly positive. (A Goldilocks economy describes an ideal state for an economy whereby the economy is not expanding or contracting by too much.)

“Although stronger domestic demand will erode some of the surplus this year, we believe that structural improvements from higher value add to commodities exports have permanently lifted the current account,” says Credit Suisse.

Yesteriday, Rakuten Trade Research noted that sentiment on Wall Street remained cautious as traders expect the Fed tapering to be earlier than anticipated.

Rakuten Trade Research also noted that Brent crude closed higher at US$82 (RM345) per barrel on Thursday, in view of the unrest in Kazakhstan.

“As market undertone continues to be weak, we reckon the FBM KLCI will face continuing road bumps ahead,” says the research unit.

Rakuten Trade head of equity sales Vincent Lau opines that the local bourse will not be overly impacted by the Fed newsflow as “investors have priced in the prospects of rate hikes and tapering, so it is about managing expectations.”

“We still see a lot of liqudity in the local bourse, and the volume has picked up, and a lot of activity on penny counters,” he told StarBizWeek.

“More worrying, is the Covid-19 Omicron variant as we are starting to see lockdowns and movement restrictions in some countries,” says Lau.

On the Fed taper prospects, Credit Suisse points out that for Asean markets in 2022, another significant difference was a credit boom turned to bust in Asean in 2013.

“While we do not expect a strong credit recovery next year, the delta should be slightly positive for loan growth and bank credit costs,” says the research house.

Also, equity valuations in Asean are considerably cheaper than in 2013, and currencies generally offer more upside now than before. “With the exception of the peso, Asean currencies (baht, rupiah and ringgit) have seen significant falls in real effective exchange rates since the May 2013 taper tantrum,” opines Credit Suisse.

On risks due to the Omicron variant, the research unit does not see any reason to expect more severe lockdowns than elsewhere in the region.

The research house points out that the higher political tolerance for fairly high infections in Asean countries relative to more developed Asia-Pacific markets, indicates a possibly lighter economic impact from Omicron in Asean.

“Although Malaysia has some significant tourism exposure, only Thailand, which stands out for its tourism dependence, seems unusually vulnerable to Omicron,” says Credit Suisse.

The research unit maintains its slight “overweight” rating on Malaysia, which it ranks below Indonesia and Singapore in its pecking order, and views primarily as a currency play.

“On the negative side, Malaysia lacks the structural potential of Indonesia and the Philippines, and the politics remain complex. EPS (earnings per share) revisions are poor,” says Credit Suisse.

However, Malaysia ranks second in Credit Suisse’s aggregate Asia-Pacific scorecard and first on valuations and looks strong on currency metrics.

It has the region’s second-lowest real effective exchange rate relative to recent history, and the ringgit has underperformed the rise in oil prices.

CIMB Group Holdings Bhd and IHH Healthcare Bhd are Credit Suisse’s top large cap favourites in Malaysia.

Meanwhile, in a commentary yesterday, TA Securities Research says the local market is also affected by worries over renewed Covid-19 restrictions stalling reopening economies and surging US bond yields dampening recovery plays.

In its Trader’s Compass report, TA Securities Research opines that Bank Negara is likely to raise the Overnight Policy Rate (OPR) by 25 basis points in the second half of 2022, bringing the OPR to 2.0%.

The research house notes that the central bank’s first Monetary Policy Committee (MPC) meeting is scheduled from Jan 19 to 20, five days before the Federal Open Market Committee meeting.

“For now, we foresee less pressure for Bank Negara to increase the OPR as the current monetary setting is seen as appropriate and accommodative,” says TA Securities Research.

On the economy, the research house points out that Malaysia’s Leading Index grew by 0.3% year-on-year to 109.5 points in October 2021 (September: 0.6% higher year-on-year), mainly attributed to the increase in the real imports of semiconductors segment.

The index recorded its second successive gain since August 2021, indicating Malaysia’s growth prospects will continue recovering in the near future.

TA Securities Research also expects the agriculture sector to recover in the final quarter of 2021 on the back of encouraging palm oil output.

In the October to November period, the production of crude palm oil has increased by an average of 4.8% year-on-year to 3.36 million tonnes, much higher than 10.8% year-on-year decrease in the third quarter, according to the research house.

“Going into 2022, we expect production continue to pick up on the back of consistent demand from major export destinations and the return of foreign workers to Malaysia,” it says.

For 2022, TA Securities Research expects the ringgit to remain volatile with risk tilted to the downside, and projects the currency’s performance to be influenced by the uncertainty of Covid-19 cases (Omicron), pressure from the US Fed’s potential rate hike and volatile Brent crude oil price.

The research house maintains its ringgit forecast average at RM4.20 against the US dollar in 2022 (2021: RM4.144 per US dollar).