KUALA LUMPUR, April 18 — Although the 14th general election (GE14) is a significant overhang for the economy and markets, volatility can still present trading opportunities due to the nation’s solid economy, earnings growth as well as pent-up demand post-election.
RHB Research said the source of market volatility would likely emanate from the risks of an escalating United States-China trade war that could have a profound impact on global growth, as well as the higher-than-expected US inflation, which could steepen the interest rate trajectory.
In its report on Strategy-Malaysia released recently, it said GE14 concerns were the main factor dragging on sentiment, but expected that business, investor and consumer sentiments to gradually recover.
The research house explained that trading opportunities would likely emerge despite the expected volatility for the remainder of the year, as this would be supported by the solid domestic gross domestic product (GDP), pent-up demand post-election and decent earnings growth.
It said the market’s fundamentals would be underpinned by the 5.2 per cent GDP growth in 2018 (up 5.6 per cent real exports and up 5.3 per cent domestic demand), while the FBM KLCI’s earnings growth is forecasted at 7.5 per cent (2018) and 7 per cent (2019).
RHB Research has set a FBM KLCI target of 1,850 points by end-2018 and is overweight on the banks, utilities, oil & gas, rubber products, gaming, healthcare, construction, basic materials, and timber sectors.
However, a key risk to equity markets would be on the unfolding trade relationship between the US and China.
Given growing concerns over an escalation in the US and China’s trade spat and a disconcerting market’s complacency on inflation and monetary policy trends, these could result in a rude awakening if inflation makes a comeback.
The fallout from trade protectionism between major countries presented a risk which would impact global trade activity, leading to slower global growth.
While Malaysia’s exports are expected to register a slower growth of 6.5 per cent in 2018, domestic demand growth remains commendable at 5.3 per cent in 2018 , led again by the private sector, on the back of relatively strong private consumption and investments.
As for the ringgit, RHB believes that external drivers will continue to emerge as key influencers on Asian ex-Japan currencies including the local unit.
Oil prices could be the wild card in this scenario, as the ringgit typically moves in line with oil prices, strengthening as oil prices rise and weakening when prices fall.
In short, even in the face of the greenback’s strength, the ringgit could maintain its value if oil prices can counteract the move, RHB said.
“With the medium-term domestic macroeconomic outlook still looking solid, corporate earnings growth expectations intact, and the crude oil markets looking evenly balanced, foreign funds have been happy to remain net buyers as this scenario reflects firm consensus expectations that there is more upside for the ringgit/US dollar exchange, contrary to our expectations,” it added.
Despite hardening expectations for higher US interest rates, net foreign portfolio flows into Malaysian equities remained positive year-to-date, although foreigners have been net neutral since February.
Cumulative net inflows remained relatively stable at US$539.5 million (RM2.1 billion) after some foreign selling in early February which contrasted with net portfolio outflows in other regional Asean markets. — Bernama