FOREIGN investors holding on to ringgit-denominated assets were greeted with bad news at the start of the new year. On Jan 21, the ringgit touched the 3.62 mark against the US dollar — the weakest in more than five years.

While a weak ringgit has its benefits for Malaysia’s export-driven economy, the currency has not traded this low since the financial crisis days of April 2009.

Deutsche Bank says in a report that Malaysia is “boxed in on all four metrics of indebtedness”. These four metrics are high foreign ownership of Malaysian government bonds and central bank bills, a worsening fiscal deficit, the highest household debt-to-GDP ratio in the region, and a current account also at risk of falling into a deficit.

The ringgit has fallen 12.5% since August last year, and is set to decline further against the US dollar before it recovers, according to currency strategists.

“I don’t foresee the ringgit recovering until June,” says a local currency strategist. “The market perception is that the ringgit is reacting to the falling crude oil prices, which are deemed to push the government closer to missing the budget deficit target.”

While market players expect the next five months to be volatile, they believe the ringgit should bottom out around RM3.70 during this period.

The ringgit’s decline is also due to a stronger greenback. The end of the Federal Reserve’s quantitative easing (QE) programme amid positive signs of a recovery in the US economy, coupled with the possibility of higher interest rates, has led to a US dollar bull run.

Impact on investments

Should local investors be worried about the depreciating ringgit? It depends on where you have invested your money, according to Pacific Mutual Bhd chief investment officer Koh Huat Soon.

“If you are earning and investing in ringgit-denominated assets, the current scenario will have no impact on you,” says Koh. “This is different from, for example, if you are a US fund manager who is invested in Malaysia. The ringgit’s decline will be felt because it will translate into fewer US dollars. With the local investor, there is no risk of unrealised foreign exchange (FX) losses.”

The stronger dollar is a boon for local investors who have invested in foreign assets as they get to reap the gains of both capital and currency appreciation. However, those who are tempted to jump on the bandwagon now might want to be cautious about the timing, according to Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew.

“From my observation, there is a build-up of short positions in the US treasuries futures market. People are expecting bond prices to fall and rates to climb as the Fed prepares to raise interest rates. Its next move depends on the health of the US economy.

“Right now, we are seeing signs of the US economy strengthening. However, if the economy stutters, the Fed might put off raising interest rates until a later date,” says Pong.

“This would lead to an unwinding of the short positions and a drop in [bond] yields. Consequently, the dollar will fall, and investors who are entering positions in US assets hoping for currency gains will be affected.”

Nevertheless, the US market continues to offer sound fundamentals, according to Danny Wong of Areca Capital Sdn Bhd. “If you study the historical patterns, dollar rallies tend to last two to three years. If you believe in history repeating itself, the dollar still has room to rise for some time,” he says.

“The risk lies in the valuations, which are already stretched right now. But if US corporates continue to make money, then there is more room for upside as no one knows the near-term trend. 

Attractive markets?

So, are the markets in Japan and the eurozone attractive now? “The effect of QE will be seen in the PMI [Purchasing Managers’ Index, which measures the health of the manufacturing sector] and the GDP figures. But if you look at the European stock markets, other than Germany, the rest are facing problems,” says Wong.

“You also have to consider that regardless of whether the stock market reacts positively or not, the euro will weaken. That is a factor that investors have to consider.

“A weak euro will mean a higher cost of imported goods for the eurozone, and this may lead to inflation while there is still low growth. A combination of high inflation with low growth is not a good thing,” he adds.

“The situation is the same for Japan, where the Bank of Japan is trying to boost spending and investment. They are talking about cutting the corporate tax rate, which will lead to better earnings for corporates. But again, you have to keep in mind that the yen will be weaker regardless of whether the equity market performs or not.”

Inter-Pacific Securities’ Pong is not so sure the European Central Bank will even go ahead with its QE programme. Firstly, bond yields are already down and the markets have priced in the QE, he says, adding that rates have remained low.

“My view is that QE will not happen. Secondly, European equities have seen sizeable gains in the past three or four months, and it’s too late to act now.”

Malaysia’s outlook

Pacific Mutual’s Koh does not believe Malaysia has ceased to be an attractive investment proposition. “The investor’s next move will depend on his investment horizon. If you take a long-term view, say, 12 months and above, there will be opportunities in Malaysia as the ringgit will stabilise,” he says.

Koh cites the example of Malaysia’s latest export numbers, which grew 2.1% in November last year, beating market expectations of a fall of 0.4%. The country’s trade surplus grew to RM11.13 billion, which is the highest in value terms for three years.

“Our current account is more resilient to oil price than most people think. The market is overly pessimistic on the ringgit, I think,” he says.

Pong is bullish on the Malaysian stock market as well. “This depends on your risk appetite. Some of the local counters have fallen as much as 28%. This means there is less downside risk to these counters, and more probability of upside opportunity,” he says.

“Under this scenario, some of the small cap stocks are worth looking at. We favour stocks that are trading lower than their historical price-earnings ratios, have strong earnings growth and have efficient use of their capital. The stock market is looking more favourable than it did six months ago.”

Areca Capital’s Wong believes that emerging markets still have much to gain from the US economy’s recovery. “Emerging markets are primarily export-driven, including Malaysia. In fact, the domestic market is heavily influenced by the oil price. Now that oil has fallen to less than US$50 a barrel, if it rebounds to US$60 a barrel, it might trigger a positive sentiment in the equity market,” he says.

“However, this is not the time to buy blue chips and just ride their gains. I would say it is stock-picking time. Overall, I am still positive on the Malaysian market.”

This article first appeared in personalwealth, a section of The Edge Malaysia, on January 26 - February 1, 2015.

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