The Relevance of Ratings Agencies

Do people still look at rating agencies "wonderful recommendations"? To put yesterday's market into perspective, the KLCI lost about 1% while Nikkei lost 1.4% ... did Japan go through a downgrade too? Rating agencies nowadays only affirm what the market already knows. But just to be fair to them, we will fall a bit in sympathy.
Truth be told, foreign funds held a lot of Malaysian bonds and last month they were already exiting based on the turmoil in funds being pulled back. The ringgit did not fall just over night, it was weakening for the past few weeks.
The Malaysian ringgit closed slightly higher at RM3.2455 against the US dollar and RM2.5529 against the Singapore dollar today. The local currency slipped to historic three-year lows of RM3.2934 against the greenback and 15-year-low of RM2.5862 against the Singapore dollar yesterday on fears of capital outflows from bond transactions.
The ringgit has dropped 2.7 percent since June 30 to RM3.2463 per dollar, a loss second only to India’s rupee among 23 other emerging-market currencies. The decline pushed the ringgit beyond the limits of the Bollinger band, signaling a reversal may be imminent, data compiled by news agency, Bloomberg said today, adding that was the biggest deviation in developing markets. Stochastic oscillators also showed the ringgit is oversold.
The ringgit’s 5.2 percent loss this year would be its worst annual performance since a 35 percent plunge in 1997, during the Asian financial crisis. It closed at RM3.2379 to the US dollar yesterday in Kuala Lumpur, the weakest level since July 2010.
Yet we are not denying that there is a problem with our deficit. There is. We need to implement the GST but that seemed to be delayed pending the outcome of another mini election end of the year.
Bloomberg reported today that Morgan Stanley has predicted that Malaysia’s economic growth and current account surplus which is more than twice China’s relative to gross domestic product, will help the ringgit catch up with regional peers.
The central bank can use its US$138 billion war chest to prop up the ringgit, according to Bank of America Merrill Lynch. The GDP is forecast to grow 5 percent this year, after a 5.6 percent gain in 2012, the median estimate in a Bloomberg survey of 21 analysts shows.
The ringgit could underperform as US$2.9 billion of sovereign notes mature today, raising the prospect of capital outflows. The currency slid this month on concern global investors, who owned 33 percent of Malaysian government bonds in May, the highest proportion in Southeast Asia, will pull funds out as the U.S. outlines plans to rein in monetary stimulus. 
Malaysia’s debt-to-GDP ratio of 53.5 percent is higher than the 25 percent in Indonesia, 51 percent in the Phillippines and 43 percent in Thailand. It is also approaching the government’s 55 percent threshold.
While Malaysia’s current-account surplus will narrow to 6 percent of GDP this year, from 6.1 percent in 2012 and 12 percent in 2011, it is higher than the average 2.8 percent in Asian countries and 2.4 percent for China.
Malaysia’s “fundamentals of a current-account surplus and sustained growth should warrant a correction in the recent weakness in the ringgit,” according to a July 25 report from Morgan Stanley analysts. Bank of America strategists including Christy Tan recommended their clients use options to buy the ringgit, saying the central bank will sell foreign reserves to shore up the currency should the decline worsen.
Will this derail the active local equity market? My view is no. The current run is not that dependent on the influx of foreign funds. There has been a willingness for local investors to parlay liquidity to stocks as they take money off the property side. 

Comments

I believe Fitch downgrade has a significant influence as we see massive selloff in the last 3 days which total RM810m net foreign selling in KLCI.

Tuesday: Net Selling RM122m
Wednesday: Net Selling RM437m
Thursday: Net Selling RM262m
Friday:?? Not sure but I think it should exceed RM100m....
Looking at net foreign selling RM810m in the last 3 days:

Tuesday: Net Selling RM122m
Wednesday: Net Selling RM437m
Thursday: Net Selling RM262m

I believe Fitch rating does have significant influence on FBMKLCI.