Saturday, April 24, 2010

Malaysian Stocks & Ringgit

In 2010, the KLCI gained 5.42% YTD as of early-April 2010, registering as the second best performer in Southeast Asia. As fiscal risks in the EU affected capital inflows, the KLCI decreased by 5.6% until early-February 2010. However, with positive domestic investments, better GDP data, the central bank’s interest rate hike and expectations of a domestic currency appreciation, stock market surged by 7.6% until early-March 2010 from February. After experiencing some correction in mid-March, the KLCI rallied again with the expectation of the government’s sustained market liberalization scheme, enhancing foreign investor sentiment. The KLCI reached 1341.8 on April 5, 2010.

The P/E ratio of the KLCI increased to 19.17 in early-April 2010 from 18.19 in late-February 2010 as the stock market rallied. The P/E ratio of the KLCI is still relatively low compared to stock markets in India and Malaysia. However, compared to South Korea and Singapore, the KLCI’s P/E ratio is high. The estimated P/E ratio for 2010 was 15.95 as of April, still attractive relative to other equity markets.

Foreign investment turned to net inflows in March 2010. According to a statement from Bursa Malaysia in April 2010, foreign institutional investments bought MYR8.9 billion (February: MYR5.0 billion) and sold MYR7.8 billion (February: MYR5.7 billion). The positive economic outlook and the recovery of exports and industrial production helped improve foreign investor sentiment. However, foreign retail investment in the stock market was unchanged in March 2010.

Local institutional and retail investment registered slight net outflows in March 2010 after posting net inflows in February. Bursa Malaysia said that local institutional investors invested MYR12.6 billion (February: MYR7.7 billion) while they sold MYR13.1 billion (February: MYR7.1 billion) in March. Meanwhile, local retail investors bought MYR6.9 billion (February: MYR3.8 billion) and sold MYR7.2 billion (February: MYR3.7 billion).

After falling to a decade low of 14 in 2009, initial public offerings (IPOs) will pick up in 2010 due to government efforts to relax investment rules in the stock market. According to Bursa Malaysia, the securities commission as of early February 2010 had already approved almost 20 IPO applications. Malaysia’s government also plans to list 10-15 government-related companies in the stock market in 2010.

After sharp depreciation in late 2008, Malaysia’s currency, the ringgit (MYR), gained 1.2% in 2009 due to an increase in the current account surplus, capital inflows and U.S. dollar (USD) weakness. However, because of the sluggish domestic economy, slow export recoveries, smaller foreign portfolio investment and FX intervention by the central bank, MYR appreciation was relatively limited compared to other Asian currencies. In 2010, while capital inflows into the equity and debt markets might continue to support the MYR, movements in the currency will be determined by the central bank’s FX intervention and the current account balance.

Higher commodity prices and exports will support the MYR in 2010. Policy rate hikes and the interest rate differential with the U.S. and Japan will boost carry trade. However, MYR appreciation will be limited as the central bank is expected to continue to intervene in the FX market to maintain export competitiveness vis-à-vis China. Moreover, any weakening of risk appetite and capital inflows, increasing imports and any political instability will constrain the ringgit appreciation.

The MYR had appreciated 6.65% YTD against the USD as of early-February 2010, becoming one of the best performers among Asian currencies. After strengthening by 2.9% until mid-January, the MYR depreciated by 3.9% until early February 2010 due to the correction in the domestic stock market and capital outflows amid the global uncertainty. However, the MYR began to appreciate again from early-February led by the stock market recovery and positive GDP data, improving investor sentiment. The central bank’s interest rate hike in early-March 2010 provided extra momentum for the MYR appreciation. Between early February and early April 2010, the MYR appreciated 6.1%. On April 5, 2010, the MYR marked 3.23 per USD.

External Balances: Exports picked up in September 2009 and has continued to improve led by higher export commodity prices, global inventory restocking and strong exports to China and India. As these effects are expected to sustain in H1 2010, exports will continue to show the recovery. The rise in exports will likely to increase intermediate goods imports in the coming months, which may somewhat narrow trade and current account surpluses in 2010. Nevertheless, surpluses will be sustained in 2010 due to Malaysia’s much larger exports than imports.

Capital Flows: After massive capital outflows in late 2008 and early 2009, capital flows somewhat returned in 2009 with the revival of the global risk appetite and somewhat improved political stability. However, compared to its peer countries, capital inflows in domestic market were relatively weak in 2009 due to the concerns about rising the government’s debt and sluggish economic recovery. In 2010, analysts forecast that coupled with the central bank’s interest rate hike in March, further monetary tightening will support capital inflows as interest rate gap against the U.S. widens. However, for further improvement of capital inflows, the government needs to show the significant progress in its economic reforms including larger domestic consumption, financial market liberalization, fiscal consolidation and political stabilization.

Central Bank Policy: The upward trend in the ringgit against the U.S. dollar and the revival of capital inflows into the equity market have increased central bank intervention in the FX market to support exports. Central bank intervention in the FX market will remain dominant until exports and global commodity prices recover, and China allows the renmimbi to appreciate. Large FX reserves and external surpluses are a plus to deal with export contraction and weak capital flows. Trends in the USD and Singapore dollar will also be important determinants of the MYR's movement. In 2008, the central bank intervened in the FX market to protect the ringgit from sharp depreciation amid capital outflows.
Under the government’s exchange rate regime, the exchange rate of the MYR is controlled against “a trade-weighted basket of currencies.” The central bank has prohibited offshore MYR trade since 1998. The fixed exchange regime was removed in 2005.


Gamelion said...

Historically, every time governments have printed their own money, fiat money, that money eventually reverted to its true value: zero. That’s because paper money is a zero-sum game. Every time our governments print more money, our money becomes less valuable. We work harder for less and less, and our savings are worth less and less. The rich will get richer. And the poor will most definitely get poorer. The middle class will be wiped out.

hishamh said...

'Under the government’s exchange rate regime, the exchange rate of the MYR is controlled against “a trade-weighted basket of currencies.”'

This is plain wrong - Malaysia has not followed a basket of currencies approach since before the 1997 crisis. It's also inconsistent with...

"The upward trend in the ringgit against the U.S. dollar and the revival of capital inflows into the equity market have increased central bank intervention in the FX market to support exports."

...which implies a different sort of currency regime entirely.

In any case, watch changes in reserves as a signal of intervention. If trade and capital inflows were attracting central bank intervention to absorb upward pressure on MYR, then you would expect an increase in international reserves...which isn't there. Taking into account revaluation loss from the MYR's appreciation, then change in reserves for the year to date (2010) is a big fat zero.