Malaysian stocks, ringgit to remain under selling pressure

The Malaysian stock market and the ringgit, which have seen constant pressure since the surprise outcome of the 14th general election, are unlikely to change course anytime soon as the US action to slap tariffs on imports from China is expected to increase risk aversion in the short term, say economists.

Last Friday, the US imposed tariffs on US$34 billion (RM137 billion) worth of goods from China. Beijing was quick to retaliate, announcing levies on the same value of US imports. Bursa Malaysia’s benchmark index, the FBM KLCI, fell 1.6% or 26.79 points to close at its intraday low of 1,663.86 points in reaction to the news, while most emerging market currencies, including the ringgit, yuan, Indian rupee, baht, won and Singapore dollar traded lower. The Malaysian unit closed at 4.0465 to the US dollar on Friday.

MIDF Amanah Investment Bank chief economist Dr Kamaruddin Mohd Nor said that the local currency as well as the emerging economies’ currencies are expected to remain under pressure this week amid heighten trade tensions between the two economic powerhouses.

He said trade tensions would hamper investor sentiments towards emerging economies, which in turn would influence the flow of funds as investors assess the possible risks and adverse outcomes associated with the dispute.

“Thus, selling pressure due to this factor as well as other external factors (faster than expected interest rate increases in the US and stronger dollar) will weigh on the ringgit and regional currencies in the near term,” he added.

Meanwhile, FXTM global head of currency strategy and market research Jameel Ahmad said there is some risk aversion in the atmosphere following the announcement by US President Donald Trump, where emerging market currencies and stock markets appear to be struggling as a result of a cautious trading environment.

“If Asian stock markets continue to trade cautiously in wake of the US trade tariffs on China coming into play, there is a likelihood that this could also negatively impact the European stock markets,” Jameel said.

Socio-Economic Research Centre executive director Lee Heng Guie noted that emerging markets’ assets, including currencies, have been under pressure in recent weeks due to the trade tensions, damaging market volatility due to capital reversals on expectations of higher US interest rates ahead and US dollar strength.

Additionally, Lee said the ringgit is expected to remain at the current trading range given the multifacet external headwinds amid domestic political and policy transition.

He noted that among the potential long-term effects from the tariffs’ implementation are slowing trade and investment as trade activity lessens, which would weigh on firms’ profitability and investments’ returns.

Lee added that domestic demand would also dampen as households’ income becomes affected by the weak performance of export-oriented companies and industries.

“In addition, global financial market volatility will have negative spillover on domestic equity market,” he said.

Therefore, Lee said the government needs to widen its trade relationships with countries that are committed to adopting fair and open trade practices while companies work on products and markets complexities to minimise the disruption amid the global network of supply and value chains.

Kamaruddin said while the research firm which does not expect local companies to face devastating near-term disruptions, they will have to be prepared if the list of products involved are part of their value chain.

Overall, economists said the continued trade spat between the US and China, the return of market volatility, and the reality of higher US interest rates pressuring emerging financial markets and currencies, are expected to weigh on Malaysia’s growth momentum this year.

“The estimated impact on GDP growth is around 0.1-0.3 percentage point,” Lee said.

However, Kamaruddin said MIDF is keeping its full-year 2018 GDP growth forecast at 5.5%.