The Ringgit Draw on the Stock Market

What does a strengthening ringgit do to our stock market?

TA Securities analyst Stephen Soo explains a firm ringgit is a boost to the stock market as it encourages fund inflows.

Although he sees bonds as the main beneficiary of a stronger ringgit, with equities next, he is more bullish on equities for the second half of the year, on the back of the tabling of the 10th Malaysian Plan and the release of more details on the New Economic Model.

“In the last two years, Malaysia has experienced a net outflow of foreign direct investments (FDIs). As the ringgit strengthens, this will at least stop some of the outflows and support liquidity flows. This liquidity will need to go somewhere and stocks will benefit,” says Soo.

Bank Negara data points to an FDI reversal in 2007, with net outflows of direct investments of RM9.14bil. This increased to RM26.06bil in 2008 and to RM14.62bil in the first nine months of last year.
Portfolio investments in Malaysia booked a net inflow of RM8.8bil in the third quarter of 2009 after four quarters of significant outflows.

JF Apex Securities Bhd CEO Lim Teck Seng feels that the recent inflow of funds have not had much impact on the stock market as most of the foreign inflows were for fixed income and not equities.

“A strong currency may not favour stock markets as theoretically, Malaysian stocks have become more expensive. For the moment, foreign funds prefer to enjoy yields rather than the riskier returns from equities,” he says.

Private equity banker Sherilyn Foong says portfolio inflows seem to be faster and nimbler than FDIs. “We’re coming from a low base on the bonds front. My main concern would be if it is, to a significant extent, hot money,” she says.

MCIS Zurich Insurance Bhd head of fixed income Michael Chang shares Lim’s views. “Buying government bonds is probably one of the easiest ways if I am expecting the country’s currency to rise,” he says.

“The risk is deemed moderate and bonds are also fairly liquid investments. Offshore investors can buy into the Malaysian Government Securities (MGS) as it is as good as buying the Malaysian currency,” says Chang.

Long-term hazard

While most people are of the view that a rising currency signals more investments flowing into the country, and therefore contributing to a rising stock market, this is a mere correlation and not a direct impact.

Past studies by ABN Amro Bank and the London Business School have shown that strong currencies do not lead to generous profits from the equity markets.

According to the research, countries with weak currencies saw greater stock returns than ones with strengthening currencies.

A broker from a local house says that a strong currency only offers short term benefit for the market. “Over the longer term, it is not good for an exporting economy and for the stock market,” he says.

Investing in stocks can be viewed as risky compared with other assets. When the central bank raises interest rates, government securities such as the MGS are often regarded as the safest investments and will usually experience a corresponding increase in interest rates.

In other words, the risk-free rate of return goes up, making these investments more desirable and a lot safer than stocks. With stocks, one has to factor in the risk premium as well.

The ringgit has strengthened some 7% to 3.2015 against the US dollar since the beginning of this year. This will impact the earnings of Malaysian exporters and various other sectors of the economy.

Over the short term, exporters such as those in the rubber glove, technology, and electrical and electronics sectors may suffer setbacks.

Says OSK Research director and research head Chris Eng: “A stronger ringgit is better for the country as long as it strengthens gradually. Lately, the ringgit has strengthened rather quickly and this may not give exporters time to pass on (additional) costs to their customers.”

Winners and losers

Rubber glove stocks have come under selling pressure of late as investors worry about a repeat of the share price collapse in 2008, when investors assumed that record latex prices, high energy prices and a weakening US dollar would dampen glovemakers’ earnings significantly.

Those who remain bullish about the industry contend that the demand for rubber gloves is resilient and that the listed manufacturers, because they are market leaders, will be able to hike selling prices to absorb cost increases.

A stronger ringgit means imports tend to cost less. Manufacturers that rely significantly on imported raw materials stand to benefit and will likely see their margins improve, provided their output is largely sold in the domestic market.

With the US dollar weakening against the ringgit, commodities such as oil and gold, which are bought and sold in US dollars, will be cheaper for purchasers in Malaysia.

Eng says in this context, the local airlines are beneficiaries, as fuel is denominated in US dollars while sales are mostly in ringgit.

“In Malaysia Airlines Bhd’s case, their revenue is mostly derived in Australian and Asian currencies. So they benefit from the strengthening ringgit,” he says.

Others gaining from the surging ringgit include automotive and food-based companies that import products in US dollars but sell them to Malaysian buyers. Companies that have large foreign debts – Tenaga Nasional Bhd for example – will also benefit. On the flip side, MISC Bhd, whose revenue is mostly in US dollars, may be at a disadvantage.

Profit impact

Eng says a stronger ringgit helps control inflation, hence strengthening domestic consumption.
One line of argument is that a strong currency also means that imported raw materials are cheaper, thus lowering inventory cost. This leads to lower borrowing obligations and hence less interest to pay.

Says a senior analyst: “The price of the finished good also goes down and this leads to a lower cost of living. The strength of a currency is an indicator of economic health.”

According to the Big Mac index, the ringgit is 40% below its fair-value benchmark with the US dollar as at March 16 (at 3.3245 per US dollar).

The Big Mac index is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries.

“Based on a trade-weighted index, the ringgit should be fairly valued at 3.23 per US dollar, which is almost close to the current level,” says AmResearch senior economist Manokaran Mottain.

He is forecasting exports to grow by some 7% to 8% and Malaysia’s gross domestic product to hit 5% this year.

Says Chang: “While some exporters lament the stronger currency, a lot of them are importers too and their costs of production have fallen. The most substantial profits are often made in finished goods, not in raw materials.

“Profits made from finished goods are more sustainable as it gives better margins on a longer-term basis. It allow us to move up the value chain.”

An observer says that while raw materials may be cheaper due to the strengthening ringgit, Malaysian exporters will still be in the losing end when selling finished goods to the global market as their products will be denominated in US dollars.

Malaysia: Speculation-driven Housing market?

The jump in home prices lately has raised concern that speculators may be taking advantage of the easy home financing scheme.

Since the introduction of the scheme early last year, property sales have improved considerably while prices in some locations in the Klang Valley and Penang have edged up by between 10% and 20%.

Under the housing facility, buyers only need to fork out a small deposit of 5% or 10% of the property price and do not need to make any further payment until after their property has been delivered to them.

Developers are absorbing the stamp duty, legal fees and interest cost during the construction stage.

While some industry players agree that there is cause for concern, most feel the housing facility is still needed at least over the next 12 months until the market is back on a stronger footing.

Ireka Development Management Sdn Bhd chief operating officer Lim Ech Chan said easy-payment schemes had its pros and cons.

With the low entry cost, such schemes enabled those who have difficulties buying a house to put down the initial 5% or 10% downpayment and have their own roof over their heads two to three years later.

“When SP Setia first came out with the scheme, it helped the mass market a great deal,” Lim said.

He said the drawback was that since buyers did not have to pay anything for the next two to three years, they may sell their units when the project was completed.

“If the project is handed to them during a boom, they can sell it. But if the project is handed to them during a weak economic environment, they will have to pay for the mortgages.”

ECM Libra head of research Bernard Ching said the recent 25 basis point increase in overnight policy rate had prompted more buyers to buy and lock in at the current interest rates as they might expect the cost of fund to rise further.

“This is the best time to buy a property for own occupancy as entry cost is at an all time low. As seen in the high buying interest in the past six months, many buyers are buying to hedge against rising inflation down the road,” Ching told StarBiz.

According to Association of Valuers, Property Managers, Estate Agents and Property Consultants in the Private Sector president James Wong, developers need to catch up with “lost time” when launches had to be deferred for more than a year as a result of the global financial crisis.

“Buyers were facing cashflow problems then and needed to watch their spending. Buying big-ticket items like a house is the last thing on their mind. There are merits in the scheme as it has lowered the entry cost and make house purchase more affordable for buyers.

“Such financing schemes require a lot of resources and only the big developers with strong financial resources can afford to adopt them. In a way, it is a variant of the build-then-sell concept,” Wong said.

He said there was still no risk of overheating in the market as the double-digit rise in property prices was registered only for very niche projects in very-sought-after locations where demand far surpassed supply.

“Property prices on the whole are still much lower compared with those in other countries. While there is still upside potential, prices will not spiral out of control,” Wong said.

Since buying interest recovered in the past few months, developers are no longer offering the housing facility across the board but only for selective projects.

“Besides, Bank Negara is very stringent and only eligible buyers who have the required minimum income level will be able to sign up for the housing packages,” Wong added.

On its downside, he said while the scheme might had drummed up sales, it could give the wrong indication of the real or effective demand for houses.

Admitting that there would always be speculators in the market, SP Setia Bhd president and chief executive officer Tan Sri Liew Kee Sin said as long as speculation was not rampant, it was actually good for the market as it demonstrated confidence and would improve market liquidity.

“The key is for banks to be vigilant in their credit assessment to determine the borrowers’ ability to service the loan. They should also be selective in terms of the projects and developers to whom they extend the scheme.”

Liew said the higher prices reflected insufficient supply to meet the strong demand for projects in good locations and there was ample room for further price appreciation for good landed residential property.

Since the scheme was launched early last year, SP Setia’s monthly sales averaged more than RM190mil between January and July 2009, which was a new sales benchmark for the company.

Mah Sing Group Bhd president Tan Sri Leong Hoy Kum said of the company’s RM727mil sales recorded last year, 51% of the buyers signed up for the easy financing facility. The sales was much higher than its target of RM453mil.

While the developers are raking it in, the banks are doing so too. So who is paying the piper. someone must!

Malaysia: Just Playing Poker with 2010 GDP Projections

Amresearch has been going hyperbole in their projection of the 2010 GDP for Malaysia.

They based their projection on the underpinning of household spending and exports that is driving Malaysia’s economic growth to levels unseen since 1996.

Amresearch’s revised forecast follows announcements by the Malaysian Institute of Economic Research (MIER) and financial services firm JP Morgan that also upgraded Malaysia’s economic growth in 2010.

Strengthening domestic and external conditions led Amresearch to upgrade Malaysia’s economic growth to 8 per cent in 2010 from 5 per cent previously. It also predicted GDP growth of 6 per cent for 2011.

Amresearch said that first quarter growth “probably” expanded at 8.9 per cent which would make it the fastest in a decade.

“With prospects of a disappointing global upswing getting dimmer, real GDP will be sustained at around 6 per cent in 2011,” said Amresearch senior economist Manokaran Mottain in a report today.

He also sees the ringgit ending the year at RM3.10 to the US dollar which, he says, will be reflective of its fair value.

Interest rates are expected to rise to 3 per cent due to the stronger economic momentum and higher inflation rates but they are not expected to affect growth.

“It (the overnight policy rate) will not choke the recovery process,” said Manokaran.

Inflation, meanwhile, is expected to rise to 2.5 per cent in tandem with improving economic conditions and potential adjustments to prices.

Manokaran said he expects the manufacturing sector to be the main growth driver this year, led by the electrical and electronics sector at 12.3 per cent growth followed by the services sector which is expected to expand by 7.1 per cent due to stronger demand arising from the positive wealth effect from the financial markets, stable employment conditions and rising income levels.

He also expects private consumption to grow at 4.5 per cent versus just 0.8 per cent last year.

“Private consumption is expected to rise on the back of improvements in the labour market, disposable incomes and consumer confidence,” said Manokaran.

He also sees exports and imports posting double-digit growth of 15 per cent and 16 per cent respectively in 2010 as well as a higher current account surplus of RM125 billion or 20 per cent of GDP.

The World Bank had on Monday released a report saying that Malaysia could grow by as much as 5.7 per cent this year but warned that growth could stall if economic reforms were not implemented.

MIER last week revised its GDP growth forecast for 2010 to 5.2 per cent from 3.7 per cent due to improving business and consumer sentiment. JP Morgan had earlier this month also revised Malaysia’s GDP growth forecast to 7.7 per cent from 6.8 per cent previously.

I will take these projections with a chunk of salt.

Malaysia: The National Debt Audit

PM Najib has just disclosed the national debt of the nation as at 31 December 2009. It amounts to RM36.4 billion or 53.7% of the GDP. Of this, RM348.6 billion,equivalent to 96.2% was domestic debt while RM13.9 billion (3.8%) was external debt.

“The small amount of external debt is in line with the government’s current policy which prioritises domestic borrowings to finance the country’s development projects as the cost is cheaper and there is less exposure to foreign exchange risk,” he said.

Najib said these debt instruments were subscribed by financial institutions, insurance companies and social security institutions.

On the borrowings for projects, he said the financiers were multilateral institutions such as the World Bank, Asian Development Bank and Islamic Development Bank while the bilateral institutions included Japan For International Cooperation (JBIC).

He said the interest rates varied and depended on the tenure of the loan and the prevailing market conditions when the bonds were issued.

Najib said the government’s contingent liabilities meanwhile were in the form of guarantees for the borrowings of statutory bodies and government companies.

As of Dec 31, 2008, the contingent liabilities of the government stood at  RM69.2 billion comprising domestic borrowings of RM59.3 billion (86 per cent) and external borrowings of RM9.9 billion (14 per cent),” he said.

He said the guarantees involved two statutory bodies and 16 government-linked companies.

Meanwhile Bank Negara disclosed Malaysia's international reserves was US$95.7 billion (RM313 billion) on April 15 compared to US$95.3 billion on March 31.


The reserves were enough to finance 8.8 months of retained imports and were four times the short-term external debt.

So, do you get a picture of our reserves and indebtedness now?

Splash Offer Unlikely to be Accepted

The revised offer from construction outfit Gamuda Bhd’s 40%-owned associate, Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (Splash), to the Federal and Selangor governments for the takeover of the water services industry in the state is unlikely to go through.

Analysts believe that the stumbling block remained the compensation payable to Syarikat Bekalan Air Selangor Sdn Bhd (Syabas), a 70%-owned subsidiary of Puncak Niaga Holdings Bhd, as the former’s concession would be terminated after the acquisition.

Gamuda had told Bursa Malaysia on Tuesday that the revised offer still stood at RM10.75bil but with the water assets to be parked under the Federal Government’s Pengurusan Aset Air Bhd (PAAB) to comply with the asset light policy under the Water Services Industry Act 2006.

Splash would then lease the assets from PAAB at a rental rate of 6% per year with an annual escalation of 2.5% under a 30-year operating licence.

Currently, the state’s water assets are parked under four concessionaires – Syabas, Splash, Puncak Niaga (M) Sdn Bhd and Konsortium Abbas Sdn Bhd.

Looming over the takeover of Selangor’s water assets, which has been ongoing for the past two years, is a water tariff hike. The increase was initially supposed to be implemented in January last year, then deferred to March but has yet to happen due to the issues surrounding the takeover.

An analyst with a local investment bank said this arrangement would not be very attractive to Puncak Niaga as the company was also looking to obtain the licence to operate and maintain the state’s water infrastructure.

“The offer price will have to reflect some form of compensation for Syabas’ loss of the concession, which in effect means Puncak Niaga exiting the business,” he told StarBiz.

OSK Research Sdn Bhd analyst Vincent Lim agreed, saying the compensation issue would have to be resolved or further talks would not get anywhere.

He said one option was for PAAB to make a higher offer.

Lim said in a report yesterday the revised offer only involved a net book value pricing for Syabas’ water assets but did not take into account the compensation payable to the company from the loss of future profits.

“Although the new offer is favourable to Splash in terms of a lower capital outlay and it being an asset light licensing model, we think that Puncak Niaga, as an indirect party to the offer, will not agree to the terms as it does not make clear Syabas’ compensation status should its concession operation cease after the restructuring,” he said.

AmResearch Sdn Bhd analyst Mak Hoy Ken said in a report that the possibility of other water entities including Puncak Niaga directly negotiating with PAAB to migrate their water assets and liabilities could not be precluded should the former not take up Splash’s offer.

He added that the valuation basis for Splash’s offer had yet to be ascertained nor had there been a specific timeline mentioned.

Mak said the deal would still need the approval of the stakeholders of the state’s fragmented supply chain including the Selangor government, which holds 30% of Splash, 55% of Konsortium Abbas and 30% of Syabas.

Peter: It Is Your Call!

I am not political but it is time that they settled this water fragmentation mess left over from the former government of Selangor. Many hidden hands were involved but that is history and the people wants to know when they can get clean water and to ensure that the water subsidy scheme remains in place.

The person everyone is looking at for a solution is Peter Chin, the Federal Minister of Water. What ever happened to the restructuring exercise?

Let us look at some of the salient points involved here.

The Selangor people wants the best solution. They want the best deal. They are hoping that with the powers vested in him viz the Water Services Industry Act (WSIA), he may work out something good.

“Section 114 of WSIA, if invoked, gives the minister the power to force the water players to hand over the assets in the name of national interest.”

So far there have been three offers. Let us look at them at close range.

i.  The Selangor government’s offer to restructure the state’s water industry.

Apparently it is fair to all water concessionaires as well as benefit the rakyat guaranteeing  no tariff increases for the foreseeable future. This is structured in such a manner due to the lower proposed leasing cost by the state government from PAAB of approximately five per cent. Compare this with Gamuda’s cost of six per cent.

Further cost savings can be realised by “the lower cost of acquiring all assets of water concessionaires”, previously estimated at between RM9.2 billion and RM10.3 billion.

The State Government acquisition is based on the principle and philosophy of not  seeking to “maximise profits but instead maximise returns” to the public. Compare this to Gamuda Bhd's offer that will instead guarantee equity returns in excess of 10 per cent per annum.

This offer  was the attempt by the  Selangor government, via its investment arm Kumpulan Darul Ehsan Bhd, to  take over the restructuring  of the water industry thereby fulfilling  its promise to provide cheaper water to its electorate.

The state’s offer of RM9.2 billion was accepted by water concessionaires, Konsortium ABASS and Splash, but was rejected by Syabas and Puncak Niaga Sdn Bhd (PNSB).

ii. The Federal Government Bid

Done through its Water Asset Management Company (PAAB). It made an “informal” offer to acquire all assets from the water concessionaires amounting to RM10.3 billion in March 2010.However, the offer was rejected by water concessionaires, Abass and Splash, while both Syabas and Puncak Niaga Sdn Bhd (PNSB) have missed the April 6 deadline to repond.

“The deal by the Selangor state government is the best there is for the rakyat as we have affirmed no tariff increases for the foreseeable future. This can be achieved due to the lower proposed leasing cost by the state government from PAAB of approximately five per cent, compared to Gamuda’s cost of six per cent.
Pua added that further cost savings would be realised by “the lower cost of acquiring all assets of water concessionaires”, which was previously estimated at between RM9.2 billion and RM10.3 billion.
He added that the state government was not seeking to “maximise profits but instead maximise returns” to the public. Gamuda Bhd has confirmed their offer will guarantee equity returns in excess of 10 per cent per annum.


iii. Gamuda also made a revised offer yesterday to acquire all of the state’s water concessionaires through its associate, Splash, and this would cost the conglomerate RM10.75 billion. This is the best in terms of the valuation of the water concessionaires, being the highest offer on the table. They have promised to freeze water tariff increase in the first year and increase only between 2-3 per cent annually for subsequent years.

The Pahang-Selangor  Water Transfer Project has already started a month back and yet we see a lack of will among politicians to resolve the problem of the restructuring of water concessionaires.

Who are we waiting for? Godot?

We must be a first world nation with a third world mentality.

Malaysia: The Traffic Back-pedal

We have become a nation of back peddlers. Soon we may just have an international event called Tour d' Langkawi for Backpeddlers. Wouldn't that be fun?

This latest backpedal from the government definitely has something to do with the Hulu Selangor by-election. We should the voters in this constituency for helping us removed three measures that will possibly cause more dismay and apprehension among the poor. I am talking abut the exorbitant traffic fines and the increase in age to 17 before you can drive.

Let us read some excerpts from a news item filed at the Malaysia Insider online  web-site today.

"A controversial increase in traffic fines has been withdrawn from amendments to the Road Transport Act 1987 today after it became a campaign issue in the Hulu Selangor by-election.

Minister in the PM's Deaprtment  Nazri Abdul Aziz revealed that the government has withdrawn three amendments for further revisions after objections raised by its backbenchers. But the DAP has made it a campaign issue, saying raising fines from RM300 to RM1,000 would be a burden to the poor.

This is also the latest laws being taken off from Parliament with the first being the Good and Services Tax (GST) Bill on the eve of the current sitting.

“I had received a letter from the BNBBC through chairman Tiong King Sing, stating their objections to the amendments of the Act. I read its contents and have negotiated with the Dewan and also obtained confirmation from the Prime Minister and the Deputy,” Nazri said, referring to the Barisan Nasional Back Benchers Club (BNBBC).[My toes are laughing!]

“So we have decided to withdraw the amendments to the next session to be discussed along with the objections raised by the BNBBC,” he added, saying the Bill will be retabled in the next parliamentary session.
The three amendments which have been dropped are:

1. Compound fines for vehicles, originally priced at RM300, amended up to RM1000 has been withdrawn.

2. The minimum age for obtaining a vehicle licence, proposed to be raised be 17 years has been retracted, keeping it at the present 16 years old.

3. Amendments to allow only JPJ (Road Transport Department) to assign a registration number plate to any vehicle registered under the act have also been withdrawn."

I do not have to list the string of backpedals beginning with the withdrawal of English as the medium of instruction for Science and Maths.