KUALA LUMPUR (Aug 7): Fund managers and heads of research expect the ringgit to keep its uptrend momentum against the US dollar due to a number of factors that include the interest rate differential in Malaysia and in the US.
Both Credit Suisse and Macquarie Research expect the ringgit to improve to 4.10 in the next 12 months, according to their respective heads of research.
The ringgit is currently trading at 4.19 to the US dollar.
Michael Chang, chief investment officer (fixed income) for RHB Asset Management Malaysia, expects the ringgit to strengthen in the next six months at the earliest, partly due to the controlled spread of Covid-19 in Malaysia, as well as encouraging inflows into the local bond market by offshore investors recently.
"We also see the interest rate differential between Malaysia [and] the US, where it still favours Malaysia given the fact that the US Federal Reserve is at zero interest rate, so this makes Malaysia more attractive as an investment destination," he said at RHB Asset Management's webinar on Malaysia: Time for a Reality Check?
Malaysia cut its key interest rate on July 7 to a historic low of 1.75%.
Although Credit Suisse's research house opines that there will be no further rate cuts, the subsequent targeted loan moratorium shows that the government is concerned about asset quality and the labour market, which raises expectations of another rate cut before year end as about 70% of household debt is on variable rates, said Danny Goh, head of research, global markets APAC, Credit Suisse Malaysia.
Goh believes that in 12 months, the US dollar will weaken, thereby causing the ringgit to appreciate against the currency.
"A few factors that will determine the [value of the] currency going forward is political stability as well as the review of Malaysia's position in the World Bond Index that is due at the end of September. Another factor that could affect the currency is the budget that will be announced some time in November — things to watch out for is if there are any plans to address the fiscal deficit and debt situation," he added.
Goh pointed out that Malaysia is the country that has given out the most fiscal stimulus as a percentage of gross domestic product (GDP) in Asia at 18.9%. Both Japan and Australia come in second with 15.8% of fiscal stimulus given out as a percentage of their respective GDPs.
Macquarie Capital Securities is of the view that a further 25-basis-point rate cut could take place as early as September, according to Prem Jearajasingam, head of Malaysia equity research & strategy, head of Asean telcos for the foreign research house.
He said the divergence on economic growth and stock market performance today come back to expectations.
"The market is looking forward essentially. Yes the economic data is negative but it's looking back a few months. Our house view is that the next hiccup for the global market is potentially the middle of 2021 when central banks relook at the fiscal pulse they put in the market and consider pulling back," he added.
Meanwhile, Goh expects a correction in the market in late third quarter this year or early fourth quarter.
"There has never been a time in history where the market has not responded to an economic recession. I would like to point out that during the GFC [global financial crisis], the market pulled back by 39%, during the AFC [Asian financial crisis] the market pulled back 52%... and [in] those two instances we had economic recession... so we think at some point there may be some correction," he said.
On the other hand, Mohd Fauzi Mohd Tahir, chief investment officer (equity) of RHB Asset Management Malaysia, believes that corporate earnings will improve after the second quarter of this year.
"Corporate earnings in April 2009 to December 2009 were upgraded by 23%. There was a lag time in the bottom of the index in 2009 and the end of downgrade in earnings then. As such, if we follow history, earnings downgraded could probably end in the second quarter this year, which is about three months since the bottom of the index in March."
"The positive thing we see now is that in July there was an earnings upgrade for KLCI earnings by 4% that [was] mainly contributed by the glove sector. That has increased the earnings and ended the earnings downgrade cycle. The good thing is we don't see any major downgrades in other sectors in the KLCI constituent index," he noted.