By Sherilyn Goh
Michael Kurtz
The Malaysian equities market is expected to underperform its Asian peers in 2016, due to headwinds in commodity prices which have not blown over, according to Nomura’s Chief Asian Equity Strategist and Global Head of Equity Strategy Michael Kurtz.
Being one of the only two countries in the region which are nett exporters of energy and commodity, Malaysia remains relatively unattractive within the Asia Pacific context from an investor’s point of view, Kurtz told members of the press at an equities outlook briefing yesterday.
Malaysia’s nett exports of energy and commodities as percentage of GDP stands at 2.1%, compared to Indonesia’s 0.3%, and is Asia Pacific’s biggest nett exporter of energy and commodities.
As dollar continues to strengthen against regional currencies, Kurtz said he remains cautious for oil and commodities price outlook for the coming year.
“Oil prices and metal prices, in our view, are still very inversely correlated to the dollar. As the dollar strengthens it will continue to create some downside risks within the oil and metal spaces, which also means we remain somewhat cautious on markets and sectors in the world which are more upstream producers of commodities and basic material,” he said.
“In a global environment where commodity prices are on the downside, it continues to work against the macro-economic balance of payment, the terms of trade, topline revenue headwind for those involved in resource extraction.”
The exception, he said, is the plantations industry.
“We do think soft commodity prices exhibited a different trend than hard commodity prices. With El Nino conditions as strong as they are this year, we do think the environment for soft commodity prices is actually considerably better.”
Fed expected to raise rates next week
Kurtz also expects the US Federal Reserve to finally raise its interest rates next week.
“We think that the Fed will be raising rates next week. Dec 16 is the date that lift-off will finally happen. And after that we think the Fed will continue with two additional rate hikes in 2016 as well. So between now and the end of next year we are looking at 75 basis point of Fed hiking,” he said.
With that, he said, also comes the ongoing increase in the strength of the US dollar. He expects Asia overall to experience about 4% currency downside. The renminbi is expected to decline by about 5%. And the ringgit is going to be declining by about another 4.5% relative to the dollar.
“There is still some currency volatility around the region, although I would hasten to point out that Asian foreign exchange decline against the dollar by this year has been about 7.5%. So we expect the volatility of Asian currency will be easing,” he added.
Asian equities to perform better in 2016
While the regional currency volatility is expected to persist into 2016, Kurtz expects the equities market to perform better than in the past year.
“Emerging Asia has been posting some soggy performance this year. The regional index having declined between 7% to 8% in annualised terms, also having posted volatility of about 16%. Asia however was certainly by far the best-performing emerging market in the world, if compared to Latin America or Eastern Europe, Middle East and African region (EEMEA).
For the Asian region, Kurtz said there has been a 6.5% topline growth in companies across the region, which comes with very small improvement in profit margins. The price-earnings multiple attached to regional stocks also come slightly higher in 2016, from 2.1 to 2.4 by the end of the next year.
“If Asia is still in the midst of a recovery, we think that cyclical, sectors stocks and particularly cyclical markets are going to continue to be outperformers. Growth stocks and cyclical stocks have been winners in 2015, as compared to value stocks, the better performance while Asia overall has posted soggy performance year-to-date.
“We prefer to focus our regional equity portfolio on markets that are the downstream consumers of commodities and basic materials. We continue to like current account surplus markets, because they have more manoeuvring room and flexibility. And generally their currencies are a bit more stable when the dollar strengthens,” he explained.
The two countries which boast the largest current account surplus are Taiwan and Korea, according to Kurtz, while the preferred downstream commodity producing countries are India, Korea, Taiwan.
In a Malaysian context, he named Maybank, Karex, IJM, Tenaga, and Genting Malaysia as top picks. With a 7.5% upside to the market, he forecasts KLCI index target to come in at 1,780 for 2016, with the base assumption that the ringgit is depreciating by 4.5%, which places the market underweight on a regional basis.
You must be logged in to post a comment.