Posted on 17 Aug 2015
AS the saying goes ‘when China coughs, the rest of the world catches a flu.’ Following the shock devaluation of the yuan, the downtrend in the ringgit, oil price and KL stock market has become more pronounced and produced a variety of reactions.
“My view is that both the ringgit and KL stock market are undervalued,’’ said Chris Eng, head of research, Etiqa Insurance & Takaful, noting that the ringgit to US dollar had broken above his support level of RM4, and the KL stock market had gone below his support level of 1,670 points.
To illustrate, at the end of 2013, the KLCI was at 1,867 while GDP grew at 4.7% and KLCI earnings at 6%; in 2014, the KLCI was at 1,761 and GDP grew at 6% and KLCI earnings fell 1%.
“For the KLCI to be at 1,600 means that the market is factoring in more than 5% contraction in earnings in 2015 and 2016 combined. That would mean that Malaysia is likely to slip into recession but I don’t think we are there yet,’’ said Eng.
Despite the negatives, UOBKayHian is still expecting a significant rebound in the KL market in the fourth quarter, with recently sold down defensive stocks ranking high in the tactical rebound list.
“While generally defensive, we advise raising exposure to sold-down defensive food and beverage stocks, exporters (weak ringgit beneficiaries) and high yielders with resilient cash flows. However, we would still generally avoid the cyclical sectors such as oil and gas and automobile,’’ said Vincent Khoo, head of research, UOBKayHian.
Generally, the market strategy remains the same, but a major concern is the ringgit which continues to weaken despite the fact that China has halted its devaluation of the yuan.
“It is a mixture of factors oil price and domestic uncertainties,’’ said a senior analyst, adding that his market strategy for fourth quarter rebound depended on the ringgit performance.
“We are still concerned about the ringgit and potential outflows,’’ said Danny Wong, CEO of Areca Capital. “We are monitoring the movement of the yuan and regional currencies need to be in a stabilised situation to calm the panic.’’
Timing of entry and exit will be crucial in the current situation of a falling stock market and the strategy is to buy and sell at the right moment, said Pong Teng Siew, head of research, Inter-Pacific Securities.
“The FBM KLCI is locked in a down spiral as buyers have turned very cautious. Only two stocks are at a year’s high. The ringgit’s consistent weakening has attracted speculators crowding in for a self-fulfilling bout of speculative selling on weakness that leads to more weakness.
“Sadly, shorts can be profitable in such an environment to the detriment of the interest of the average Malaysian.
“The other factor is another leg down in the oil market; oil and gas stocks will receive another blow,’’ said Pong.
The speed of the fall in the ringgit needs to be controlled; pegging at the wrong level can damage the trade balance while raising interest rates (to make borrowing for shorting more expensive) can cause a recession and property slump.
“The day of reckoning for the ringgit has arrived. The ringgit’s stability depends on how the external risk drivers pan out and also nagging domestic issues,” said independent economist Lee Heng Guie, adding that the yuan’s surprise devaluation added intensity (to some extent) to the already battered ringgit, along with other regional currencies.
Although the yuan is not yet an international currency or global reserve currency, it is somewhat an anchor currency for regional economies as China has increasingly promoted usage of the yuan as a trade settlement currency in the region.
“With the yuan starting to join the party of currency war games, along with the prospect of the Fed’s rate lift-off in the months ahead, the regional currencies, including ringgit, will have to brace for a rough ride ahead,’’ said Lee.
Economists are adjusting their forecasts for the ringgit and oil price.
“The yuan devaluation has changed the macro equation slightly. It signifies a much weaker Chinese economy than what we had initially thought. Although a part of the argument for the devaluation is to move towards a more liberalised foreign exchange regime for China, we think the main underlying reason is the country’s sagging export performance (-8% in July). This has an implication on the future demand for global commodities which include crude oil.
“Brent oil price had gone up to our projected level of US$65-US$75 per barrel in May (highest was US$69) and is now at the lower range due to demand and supply factors. Upcoming supply from Iran will add to global output glut with weak demand from China exerting further downward pressure on oil prices. As such, we are now tweaking our price range forecast for Brent to US$50-US$60 per barrel for the rest of the year,’’ said Norzahidi Alias, associate director/chief economist, Malaysian Rating Corp.
Noting that historically, the ringgit has close correlation with both oil price and the yuan, Norzahidi expects limited upside for the ringgit at this juncture especially if oil prices continue to move within the current trading band and the yuan continues to depreciate against the US dollar.
“In the short term, the ringgit has already entered our worst case scenario, trading at 4.00-4.10 against the US dollar, which did not factor in the yuan devaluation but more of weaker-than-expected crude oil prices and domestic political issues.
“We have revised the ringgit/US dollar rate to 3.95 from 3.78 for end of 2015, and to 3.85 from 3.65 for end-2016. The ringgit level of above 4.00 to the US dollar is seen in the short term before some stabilisation by year-end, assuming no further yuan devaluation and a very slow interest rate hike by the US Fed,’’ said Suhaimi Illias, chief economist, Maybank Investment Bank.
Limiting impact on ringgit
Echoing the sentiment on the ringgit, Hong Leong Investment Bank chief operating officer of global markets, Hor Kwok Wai, said before the yuan devaluation, he had expected the ringgit to hold below 4.0 to the US dollar; now, that is going to slightly overshoot 4.0.
“They started devaluing when onshore yuan was at 6.11 to the US dollar, now it is trading around 6.40; it could reach 6.70,’’ he said, noting however that the yuan/US dollar move would likely be more orderly and gradual, limiting the impact on the ringgit.
The recent stock market routs in China and the US has left even billionaires gasping for breath. Jack Ma of Alibaba, tagged as the third richest man in Asia after Wang JianLin of the Dalian Wanda Group, and Li Ka-shing, saw his net worth decline on the US market by US$6.3bil after reaching a high of US$37.4bil on June 3.
Last Wednesday alone, Ma’s fortune declined by US$752mil after his Alibaba group holding dropped to the lowest level since the biggest e-commerce operator in China went public in September, said Bloomberg.
Alibaba has lost more than US$71bil of its market value this year amid a saturation in the e-commerce market in China’s larger, wealthier cities. Alibaba’s quarterly sales rose at the slowest pace in at least three years and transaction volumes missed analysts’ estimates amid a weakening Chinese economy.
The Alibaba stock has never traded below US$68 a share, the price set in September’s initial public offering, which raised a record US$25bil, said Bloomberg.
The HFRI Index, which tracks hedge funds that predominantly invest in China, shed 7.7% last month after Chinese stocks suffered their sharpest daily percentage decline since 2007, ending down 8.5% in a single day, said CNBC.
As a result of these performance losses, total capital invested in Asian hedge funds tanked US$10bil in July after climbing to record highs of US$126.3bil in the first half of the year, said CNBC, quoting data from Hedge Fund Research (HFR).
China-focused hedge funds lost as much as 10% in July, but despite this precipitous one-month decline, year-to-date returns of 8.5% are “still among the industry’s best”, said CNBC, quoting intelligence firm eVestment .
Goldman Sachs had estimated the Chinese government spent around 900 billion yuan (US$140bil) to support the stock market in June and July, equivalent to around 2% of total market capitalisation.
An estimated US$3.5 trillion has been wiped out in China’s stock market rout.
Apart from macroeconomic concerns, financial markets upheaval in Malaysia is compounded by internal political issues. Foreign institutions continue to be steady net sellers in the latest stock market free fall.
Investors will be watching closely for signs of stabilisation as funds driven by domestic liquidity seek some decent returns. It is advisable that politics driven by self interest be kept at bay for the common good.
Stock market fortunes are hard to hold onto; in the case of Alibaba, it is back to fundamentals as slowing sales dent investors’ appetite for the stock.
Likewise, hedge funds invested in the Chinese stockmarkets suffered bruising losses although the recommendation is still for long term, strategic investments.
