Investors should not get carried away by the upbeat sentiment in the local market, says David Ng, chief investment officer at Affin Hwang Asset Management Bhd. “Investors can put more money into the local market, but not a significant portion.”
He says corporate earnings have not seen a major improvement despite the turnaround. Also, certain players could take profit and realise gains moving forward, which would slow down the momentum.
In addition, the ringgit could experience more volatility, says Ng. Thus, investors should be cautious and ensure that they are sufficiently diversified into other regions and currencies.
He adds that the ringgit could strengthen to 4.30 against the US dollar (from 4.43 at the time of writing), due to higher foreign interest in the Malaysian market because at current levels, the currency is deemed “cheap” when taking into account the country’s economic fundamentals.
This can be seen in the ringgit’s real effective exchange rate, which is used by economists to determine the value of a currency. At the current exchange rate, the ringgit is lower than during the 1997/98 Asian financial crisis. The rupiah, on the other hand, is 174% higher.
But these are uncertain times and the ringgit could fall even further should any market-changing events occur. Events such a new US policy decision or unexpected results in any of the general elections in Europe this year could trigger another round of fund outflows from the local market, says Ng.
“It is hard to tell if the ringgit will continue to strengthen. A lot of people took their money out last year despite the central bank’s measures to control capital outflows. Deposit growth declined and capital took flight. Deposits have started growing again since the end of last year, but they are not very strong,” he adds.
Ng suggests that retail investors diversify into other countries, which will give them exposure to their currencies. He favours Asia-Pacific, particularly China, where corporate earnings are improving on the back of a rising
Producer Price Index, which measures the average change in prices received by domestic manufacturers.
This is despite the fact that its gross domestic product growth has slowed to about 6.5% from 8.3% in 2015. “Everybody is fixated on China’s [slowing] GDP growth. But company earnings are improving, which is good from a stock market perspective,” he says.
Ng favours China’s financial sector because it could benefit from an anticipated interest rate increase, in line with the US Federal Reserve’s rate hike cycle. Also, the Chinese government’s reforms — which include the closing of loss-making state-owned enterprises — have reduced excess capacity in the commodity sector, increased the profitability of surviving companies and reduced the number of non-performing loans.
“Asset quality will improve, especially for the smaller banks in the private sector,” he says, adding that consumer products and infrastructure are among the sectors he likes.
Ng says, while investors should not be too bullish on the Malaysian market, he does like the local commodity sector — particularly palm oil and aluminium — because it is expected to continue to benefit from the growing demand.
He also likes local banks because their asset quality is improving. “We are expecting a turnaround story for local banks.”
From a currency perspective, investors should consider diversifying into US and Singapore dollars to gain exposure to those countries, says Ng. Local investors should diversify into the Singapore dollar as it moves in tandem with the ringgit, he explains. Hence, those who hold the currency will not lose out if the ringgit appreciates against the US dollar. “At the same time, the Singapore dollar tends to strengthen against the ringgit over the long term [which will provide investors with currency gains].”