KUALA LUMPUR (June 28): Global investment bank Nomura has cut its gross domestic production (GDP) growth forecast for Malaysia to 3.9% for 2016, from its previous target of 4.3%, following the United Kingdom (UK)'s decision to leave the European Union (EU).

Nomura Singapore Ltd vice president Mixo Das said the lower expectation of economic growth for the year is due to Malaysia's trade exposure to the UK, as economists expect a 2% correction in the UK's economic growth this year.

"UK economists are looking at a correction of 2% in terms of economic growth, compared to the previous expectation of a 2% growth, so essentially it's a 4 percentage point (ppt) downgrade.

"Then there's also the 0.5 ppt downgrade for the Euro area's economic growth. These factors will obviously weigh on the economic prospects in Asia.

"Currently, our economists are looking at 0.3 ppt downgrade for Asia ex-Japan GDP growth forecast for 2016. Specifically for Malaysia, it's a 0.4 ppt cut to 3.9% from 4.3%," said Das at a press conference today.

Note that Nomura's forecast of 3.9% is lower than the official forecast of 4% to 4.5% growth in GDP for 2016.

Despite the lower growth expectation for Malaysia, Nomura had recently upgraded Malaysia to "overweight", based on expectations of dimmer prospects for developed markets following Brexit.

"The main reason for the upgrade is Brexit. What Brexit does is it changes the macroeconomic outlook. Firstly, it reduces the prospects for developed markets. Secondly, it reduces the prospects for policy tightening and in fact increases our expectations of policy easing.

"So right now, we are expecting all central banks in the region to cut rates further. Essentially there's this massive policy easing coming through," he said.

Meanwhile, he said the political risk in Malaysia remains high, and although the risks may not escalate, Das said it will take a while to regain investors' confidence.

"Political risk in Malaysia has been high for some time. While I don't specifically see any reason for it to go higher from here, the reduction in political risk will happen at a slow pace over an extended period of time," he said.

He added that the issues surrounding 1Malaysia Development Bhd (1MDB) is still on the minds of foreign investors, while noting that foreign holdings of Malaysian equities is still at 10-year lows.

"From a financial perspective, I think 1MDB is still extremely solveable. Whatever the case may be, it should be easily digestible with the government's balance sheet," he said.

Overall, Das said markets in the ASEAN region will see a rangebound performance in 2016.

"Like other markets in the region, we see the KLCI to be rangebound this year. Our year-end target is 1,765 points. I think that 1,600 is a semi-hard floor for the index," he said.