Tumbling equity market is ‘quite normal’, says OCBC Bank

By NG MIN SHEN / Pic By TMR file

The drop in global equities is deemed “quite normal” as a market correction is necessary to avoid financial bubbles following a bullish run in the last 13 months.

Oversea-Chinese Banking Corp Ltd (OCBC Bank) chief economist Selena Ling (picture) said the global financial markets are expected to see some volatility this year, though the economic outlook for Malaysia this year appears to be positive.

“We will see bouts of increased volatility, a bit like what we saw this week which was quite normal,” she told reporters at OCBC Bank’s 2018 economic outlook in Kuala Lumpur last Friday.

“If you look at last year when markets were moving in one direction, that can signal market complacency, so some withdrawal of policy accommodation, like what was started by the US Federal Reserve (Fed), is necessary to avoid financial bubbles.”

The heavy flow of foreign funds into the Asia-Pacific region excluding Japan during January this year was up to a third of the total foreign fund inflow in 2017, Ling said.

“We cannot expect that pace to be sustained for long. Hence, the pace of correction was very fast as seen this week,” she said at the event last Friday.

Global equities plummeted last week as investors sought to allay fears of rising interest rates amid higher inflation, greater wages growth and a stronger US economy.

Despite the anticipated market fluctuations, Ling said liquidity remains at acceptable levels in Malaysia as people have been bargain hunting in the wake of the regional and global sell-offs.

However, the sentiment on the ground is expected to adjust in the short term following the equity market plunge, as consumers and businesses are only now showing more confidence though gross domestic product (GDP) growth and financial markets have been strong in the past 1½ years.

“There could be a slight concern on the pace of the drop in equities, but as long as headline growth numbers remain healthy and there is no recession on the horizon, (sentiment) should stabilise.

“People are now very sensitised to risk events or headlines compared to economic indicators because those indicators have already been factored in,” she said.

Commenting on the central bank’s recent decision to raise the Overnight Policy Rate by 25 basis points last month, Ling said the authority’s stance going forward is unlikely to be hawkish, with one more rate hike at most this year.

Meanwhile, the ringgit is expected to continue strengthening against the US dollar due to the weak greenback narrative, although the ringgit’s movements against other currencies will continue to remain limited.

Further interest-rate hikes by the Fed are unlikely to lend much traction to the US dollar.

Ling expects Malaysia’s GDP growth to register at 5% in 2018 due to a high base effect and slower growth in major trading partners, while headline inflation is projected to average lower due to the base effect wearing off.