Thursday 28 Mar 2024
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THE strong US dollar environment which is expected to continue into 2015 will mean a tough time for equity markets in Asia, especially for markets with high exposure to commodities. If demand for commodities continues to slow next year, Southeast Asian markets are likely to suffer.

According to Johanna Chua, managing director and head of Asia-Pacific economic and market analysis at Citi Research, US economic growth is at the opposing side of other regions such as the eurozone, Asia-Pacific and Japan.

After years of maintaining near-zero-interest rates, the Federal Reserve is expected to raise interest rates next year as the US economy recovers. This situation is likely to drive up the dollar against other currencies, depressing commodity prices further, says Chua.

“A strong dollar is not very good for commodity prices, unless we get a lot more action from China’s stimulus, which will drive up demand for commodities. If you look at the outlook on China, I don’t think the government is going to do a mega stimulus.

“So it is going to be a strong dollar environment, which is tougher for Asia to perform,” Chua says during a recent interview with selected Malaysian media. She expects the ringgit to settle at RM3.40 per dollar next year.

The ringgit has depreciated 9.4% against the dollar to last Wednesday’s RM3.4425, from the year’s peak of RM3.1463 on Aug 27. According to Bloomberg data, the ringgit is expected to settle at RM3.36 per dollar by the end of 2015.

Within Asia, markets with high yield currencies, such as the Indian rupee and Indonesian rupiah, will do relatively better than the rest, she says. This is because investors could borrow from a low interest rates countries, such as those in the eurozone or Japan, and invest in a market with higher yields.

While the ringgit can be deemed as a high yield currency compared with the euro and yen, Citi Research does not have an “overweight” call on the Malaysian stock market due to the economy’s exposure to commodity prices such as crude oil, natural gas, palm oil and rubber.

Nevertheless, Malaysia’s diversified economy, with almost one-third of its exports made up of electrical and electronics components, is expected to be less impacted by the low commodity prices, compared with some Latin American and African countries, says Chua.

“The good news about Malaysia is that you are not as commodity-centric as some Latin American countries. Malaysia’s economy is pretty diversified. Yes, it has commodities, but also a lot of manufactured goods.

“So the fact that the economy is diversified, unlike South Africa’s or Brazil’s, helps. But there will still be an impact from the low commodity prices on the economy and stock market,” she says.  

The benchmark FTSE Bursa Malaysia KLCI has been under selling pressure since July, dropping by 6.8% to last Friday’s 1,749.37 points. The index dropped by over 4.2% between Nov 26 and last Wednesday, a period of five trading days.

Selling pressure was exacerbated by Petronas’ CEO Tan Sri Shamsul Azhar Abbas’ comments that the national oil company may undertake a 15% to 20% cut on its planned capital expenditure next year, due to low crude oil prices.

North Asia to do well, Indonesia to shine

Within Asia, Chua says Citi Research is more bullish on the China story, on the back of its continued economic reform and rebalancing strategy. The firm is also bullish on Taiwan, as its export-dependent economy rides the US economic recovery.

The low crude oil price is favourable to the economies of North Asia, which are huge consumers of the commodity. On the other hand, Southeast Asia will be impacted, as most [of its countries] are commodity exporters, and their prices move in tandem with crude oil.

“We are overweight on China; we think they are going to do more cyclical easing and a few more reforms going into next year. The valuations in Southeast Asia are not really cheap, and a lot of the growth is slowing down.

“So where do we see more [of a] growth story? Maybe China, maybe places with more quantitative easing, and we are also a little bit more positive on Taiwan, as a play on the US upcycle. It is more on North Asia than Southeast Asia,” says Chua.

However, Chua expects Southeast Asian bond markets to still do well, due to the high yields they offer investors, as well as fuel price reforms in countries with big fuel subsidy bills, such as Indonesia and Malaysia, she notes.  

“We expect there is a demand for carry-on yield, and in Southeast Asia, yields are still pretty high in Indonesia. Our strategists have become a little more positive on the Indonesian story on the bond side, on the back of the fuel price reform there.”  

Low crude oil prices will not impact government revenue

The decision by the Organisation of Petroleum Exporting Countries (OPEC) on Nov 27 not to cut production suggests that crude oil prices will continue to remain low over the next 12 months.

Petronas’ Shamsul forecasts crude oil prices to settle around US$70 (RM241.28) to US$75 per barrel next year, compared with the Malaysian government’s forecast of US$105 per barrel, as outlined in Budget 2015.

Some parties have been calling for the Malaysian government to revise its Budget 2015, due to the substantially lower crude oil prices. Income from the petroleum industry amount to about 40% of the Federal government’s coffers.

However, Chua is not so concerned about the impact of low crude oil prices on Malaysia’s government revenue. She says the impact of crude oil prices are more profound on Malaysia’s subsidy bill, rather than government revenue.

“We find petroleum-related revenues for Malaysia don’t seem to be responsive to low oil prices. I think the government is always very conservative when they do the budget, so they set a lower Tapis oil price, and there is always some room for manoeuvre with Petronas’ dividends.

“[Government] revenue seems less sensitive to oil prices, but the subsidy bill seems to be more responsive. The deregulattion of RON 95 is very positive for long-term sustainability of fiscal and credit ratings,” she says.  

Nevertheless, Chua says that low crude oil prices will impact natural gas prices. Malaysia, being one of the largest natural gas exporters in the world, will be impacted by the low prices of natural gas if crude oil prices continue to fall.  

A wild card that could support crude oil prices is if China cuts its interest rates further next year. Investors are waiting for the People’s Bank of China to cut interest rates to support the country’s slowing economy.

“The real interest rate is getting higher and higher, and people are starting to worry that China is behind the curve. But when they finally cut the rates [on Nov 25], you see commodity prices went up, all the currencies rallied, so there was a little bit of a positive signal,” Chua says.


This article first appeared in The Edge Malaysia Weekly, on December 8-14, 2014.

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