Last week, both of my mum’s Vietnamese shop assistants downed tools and resigned. They said that the steep decline in the ringgit (34% lower against the US dollar in 45 months) no longer made it feasible for them to continue working here. 

On the same day (March 15), Credit Suisse (CS) released a report saying it was switching out of its profitable positions in Brazilian equities and putting the money into Malaysia.

It described the move as “rotating from an increasingly consensus favourite among emerging market investors into perhaps the most unloved mainstream emerging market”. Which, in plain English, means, “I’ve cashed in my chips at the poker table and I’m off to bet on roulette now.”

So, which data point is more reliable? The young and barely literate Vietnamese girls who have voted with their feet or Alexander Redman and Arun Sai, the CS analysts who are so well-educated that they have more alphabets after their names than some doctors?

The answer is, it depends.

CS says there are 10 reasons for their decision to turn bullish on Malaysia:

• Consensus gross domestic product (GDP) growth forecasts showing early signs of upgrades;

• Earnings revisions turning positive for the first time in close to five years; 

• The ringgit appearing attractive at current levels after significant devaluation; 

• Equities undershooting their typical association with relative value creation; 

• Repair in the macro environment benefiting the heavyweight banking sector; 

• Consumer sentiment appearing to recover;

• A macro regression model that shows a potential 8% upside for MSCI Malaysia; 

• Malaysian equities so far lagging the recovery in oil prices; 

• Malaysia continuing to be a consistently attractive yield play in emerging markets; and 

• Fund positioning and analyst recommendations being extremely bearish.

I’m no analyst or financial whiz, but in calling this trade, it appears that Credit Suisse has not cited a meaningful reversal in any of the countervailing economic and political reasons that caused the ringgit to plunge in the first place.

Instead, in at least five of the reasons cited, the justification for a recovery centres purely on the fact that values have fallen so far or that the divergence with fundamentals have gone on for so long that it “must be time for Malaysia to normalise”.

So far, CS has been proven right.

Since its call, the ringgit has recovered from a closing price of 4.44950 versus the US dollar to its current level of 4.42862. That is a one-week, 0.5% gain, which in full-year terms, might eventuate in a 24% recovery, if it keeps up the current trajectory.

But what has changed about Malaysia’s fundamentals?

The truth is, the same underlying reasons that precipitated the collapse of the ringgit (so bad that foreign workers from a less-wealthy and lower sovereign-rated country have fled) unfortunately remain intact.

At home, those reasons include:

• The still-unresolved 1MDB, SRC International and other assorted financial debacles eroding confidence;

• Bank Negara’s interventionist measures in foreign exchange markets, making it less compelling to trade in the ringgit overseas;

• Household, corporate and government debt levels that are among the highest in the region, impeding growth and spending;

• Poor productivity and mediocre education levels that have curbed the production of skilled personnel; and

• Indigent faith in the system and the country’s institutions, affecting investment and spending

And overseas, they include:

• The US Federal Reserve’s rate normalisation timetable, making it less compelling for large foreign investors to hold riskier, poorer-grade debt;

• Uncertainty in global oil prices affecting oil-producing nations such as Malaysia;

• A slowing China, which has been Malaysia’s largest trading partner since 2008; and 

• Poor global sentiment towards Malaysia, explaining the lack of recovery in the ringgit even with benchmark Brent crude staging a 22% rebound between mid-December last year and mid-January.

The above, in toto, are the self-same reasons that prompted the Second Finance Minister to admit to an at least two-year delay in its aim of achieving fiscal parity by the targeted 2020.

So, back to the question. Who is right? The Vietnamese girls or the Credit Suisse analysts?

Reading between the lines, both.

The only difference is timing. The girls have cashed in now, while for CS, it is merely a trade. Like hawks, it is waiting for an acceptable gain before also cashing out its chips to “rotate into another unloved mainstream emerging market”.

Almost like a game then, except that for the long-suffering Malaysian struggling to make ends meet, it is no laughing matter.

Khoo Hsu Chuang is contributing editor at The Edge Malaysia

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