Thursday 28 Mar 2024
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ONE headline stood out last week — that of the ringgit falling to a 9-year low against the US dollar. At its worst, the ringgit topped 3.77 or just a hair’s breadth away from where we pegged the currency way back during the 1997-1998 Asian financial crisis.

The weakening of the ringgit had been expected — and inevitable under the weight of low commodity prices, slower domestic consumption and economic growth. But the pace of the decline has exceeded all market forecasts at the start of the year.

There is now growing acceptance that things will have to get worse before it gets better.

GDP growth in 1Q15 slowed to 5.6%, from 6% in 2014, and this is probably the best quarter we are going to see for the rest of the year.

Disappointing April export numbers — which fell 8.8% year-on-year — knocked on hopes that the weak ringgit will boost export and compensate for lower revenue from commodities. There really is not much that we can do to increase demand — currency war included — in the face of sluggish growth in the developed world and a slowdown in regional economies.

A snapshot of our current and trade accounts underscores the economic deterioration, which is also worse than our neighbours — Indonesia, Thailand and the Philippines — primarily, because we are a net exporter for oil and gas and crude palm oil.

But the magnitude of the drop in Malaysia’s reserves and currency — the worst in the region over the past one year — could also suggest rising risk premium, not least due to the debacle of one sovereign wealth fund and political uncertainties.

Foreign holdings of Malaysian Government Securities (MGS) have held fairly steady. But outflows from the equity market have intensified, totalling over RM6.7 billion in the year-to-date — and almost as much as that for the whole of 2014.

A comparison of market valuations too seems to underscore this point. Our local bourse is trading at lower trailing P/E multiples compared with the markets in Indonesia, Thailand and the Philippines. Lower valuations typically indicate lower expectations of growth and/or a higher risk premium. In our case, it is likely a combination of both.

I suspect the uncertainties have also shaken domestic confidence, already hit by rising inflation. Cost of living for the average Malaysian has undoubtedly risen after GST. Imported goods are also now pricier following the ringgit’s steep fall.

On the other hand, tempered outlook for the economy means that businesses are cautious on expansion and new hiring — and modest wage increases. Weakness in stock prices equals lesser scope for wealth gains.

Poorer job prospects and cost of living that is outpacing wage gains translate into falling confidence and domestic consumption. This is best reflected by the decline in MIER’s Consumer Sentiment Index to a 6-year low.

Completing the perfect storm — better jobs and retail sales data out of the US last week fanned expectations that the Fed will make its first rate hike move in September. This will result in capital outflows from emerging markets, a reversal of the massive liquidity infusion created by rounds of quantitative easing since 2008.

Notably, bond yields have reacted by jumping higher. Yields on the benchmark MGS closed at 4.12% Friday — up from 3.9% at the start of the month. Yields rise as prices fall. The prospect of higher borrowing cost will be another struggle for debt-laden government, companies and consumers. In the worst-case scenario, further cutback in domestic consumption will have negative feedback to the economy and perpetuate a vicious cycle.

This is reality. In the globalised world, almost every aspect — the financial sector, the real economy — is closely intertwined. And sometimes, reality bites.

My portfolio mirrored the decline in the broader market last week. Total value was down 1% compared with the 0.6% decline for the FBM KLCI — paring total returns for my portfolio to 12.8% since inception. I continue to outperform the benchmark index, which is down by 5.2% over the same period. I kept my portfolio unchanged, for now, but I will be tempted to lighten up on any market rebound.

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This article first appeared in The Edge Malaysia Weekly, on June 15 - 21, 2015.

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