External uncertainties continue to affect equity market, ringgit, say analysts

A restaurant displays a sign informing patrons of the revised prices following the re-intorduction of the SST. (Bernama pic)

KUALA LUMPUR: The extent of the trade war and how it may evolve will plague regional equity markets, including Malaysia, as fund managers remain on the sidelines and adopt a wait-and-see approach, said Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid.

The Malaysian equity markets, he said, are still marred by external uncertainties.

He told Bernama that the United States’ economy continued to exhibit a healthy trend with second quarter 2018 gross domestic product (GDP) growth revised upwards to 4.2% from the earlier estimate of 4.1%.

Mohd Afzanizam said at this rate, the US economy is cruising at a fast pace with inflationary pressures rising, premised on the fact that inflation was hovering at 2.9% in the past two consecutive months.

“Obviously, the prevailing inflation rate is above the 2% target of the US Federal Reserve which implies that the US central bank is on track to raise its federal fund rate at the upcoming meeting in September.

“On one hand, we have a situation where we have a higher interest rate environment in advanced countries and on the other, anxiety over policy direction domestically.

“Perhaps, this could explain why the net foreign fund flow trend was uneven although intermittently we saw net inflows,” he said.

Overall, Monday to Wednesday of the week just-ended saw total foreign net attrition of RM63.6 million which offset the foreign net inflow of RM46.5 million recorded for the week ended Aug 24, said Malaysian Industrial Development Finance Bhd (MIDF) Research Analyst Adam Mohamed Rahim.

“However, investors fled Malaysian stocks with a large net outflow of RM121.6 million as investors took the opportunity to cash in gains ahead of the long weekend.

“This was also in conformity with other markets, namely Thailand and Indonesia. We note that there was no fresh catalyst as investors were still waiting for direction from latest trade negotiations between the US and Mexico,” he said.

Meanwhile, on a year-to-date basis, as of Aug 29, the total foreign net outflow from Malaysia stood at approximately RM8.6 billion or US$2.2 billion, the second lowest outflow (behind the Philippines) amongst the four Asean markets tracked, Adam added.

At Thursday’s closing, Bursa Malaysia’s key index ended broadly lower at 1,819.66 from Wednesday’s close of 1,820.64, with losers trouncing gainers 685 to 299.

Bursa Malaysia and its subsidiaries were closed on Friday for the National Day holiday.

“On a cumulative year-to-date basis, until Aug 29, it was no surprise that the KL Consumer Index was the largest gainer with 13.9% increase amidst the tax holiday, giving some support to the overall market while the KL Construction Index was the worst performer so far this year with a 31.6% decline.

“With policies coming into place such as the Sales and Services Tax, we believe confidence among foreign investors is improving. Nonetheless, this may also be affected by external developments such as the ongoing trade dispute between Beijing and Washington and trends of monetary policy tightening in other major economies around the world,” he said.

Asked whether Malaysians were ready for the SST, amid the current high cost of living, MIDF Amanah Investment Bank Bhd Chief Economist Dr Kamaruddin Mohd Nor said the SST covered fewer items (5,445 items exempted) and involved fewer compliance costs at the business end, unlike the goods and services tax (GST).

“Thus, it will be less costly for businesses to operate and hopefully this will translate into savings for consumers,” he said.

Concurring with this view, Malaysian Institute of Economic Research executive director emeritus professor Dr Zakariah Abdul Rashid said SST implementation, from Sept 1, would benefit consumers.

He said the impact on the price of goods and services after Sept 1, might be minimal on consumers.

“Consumers will be less burdened with the re-enforcement of this SST because only those involved will have to pay the tax. If we look at the zero-rated GST last June and the ‘tax holiday period’, consumers actually enjoyed lower prices for goods in June,” he said.

On Tuesday, the Yang di-Pertuan Agong, Sultan Muhammad V, gave his consent to implement the SST, paving the way for the tax to come into effect on Sept 1.

Finance Minister Lim Guan Eng said the SST implementation was in line with the Pakatan Harapan government’s commitment to fulfilling its manifesto promises during the last general election and hoped to alleviate the people’s burden, even though the government would only collect RM21 billion in SST compared with RM44 billion from the GST.

As for the ringgit’s performance for the week just-ended, FXTM Global Head of Currency Strategy and Market Research Jameel Ahmad said the local note managed to find some support from the weakening greenback once news filtered through that the US had unexpectedly reached a trade agreement with Mexico.

“However, emerging market sentiment remained pressured with concerns still present about the protracted trade negotiations between the US and China, which is yet to publicly yield any progress,” he said.

Jameel said it would be a very busy week ahead for the Malaysian economy, both in terms of domestic data announcements and with the ongoing trade tensions remaining in the global market.

He added that it was also important to monitor ongoing developments with the Turkish Lira, as the currency was very much at risk of entering a new crisis phase.

“If the Lira does sell off at a similar pace to what occurred at the beginning of August, this will keep major investors away from emerging currency markets, once again.

“This means that the ringgit will again suffer from the fallout of a weak emerging market investor sentiment,” Jameel said.

Another factor that could drive the ringgit was developments with China-US trade tensions, he added.

“There is optimism building that the US could announce new agreements with Canada and the European Union over the coming days, which will provide encouragement to the underlying suspicion that US President Donald Trump does not intend to begin a global trade war.

“How the US dollar reacts to trade developments will be pivotal towards any future developments in the ringgit,” he said.

Jameel said the ringgit, in all likelihood, would range between 4.10 – 4.12 over the coming weeks.