Fed rate cut to benefit Bursa

StanChart says rate cut will extend economic cycle and warrant continued preference for risk assets on a 6to 12-month horizon


A RATE cut by the US Federal Reserve (Fed) would help the American economy and be a silver lining to emerging equity markets including Bursa Malaysia, according to Standard Chartered Bank Malaysia Bhd (StanChart).

StanChart head of managed investments and product investments Danny Chang said a rate cut by the Fed would benefit North-East Asia emerging markets (EMs) like China, Hong Kong and South Korea the most, as global investors will seek higher dividend yield portfolios and technology advancement in these countries.

“Historically, when there is a US Fed rate cut, it will not lead to a recession in the country and it will be good for emerging equity markets including Bursa Malaysia,” he said to reporters during Standard Chartered’s Global Market Outlook second half briefing last Friday.

The bank’s Global Investment Committee believes a potential interest-rate cut by the Fed will extend the economic cycle and warrant a continued preference for risk assets on a six-to 12-month horizon.

The Federal Open Market Committee is scheduled to meet on July 30, and Fed chairman Jerome Powell has signalled concerns over global growth and risk of a prolonged shortfall in inflation from the 2% target during recent congressional testimony, indicating dovish stance of the financial regulator.

Chang said weak corporate earnings and high valuations continue to drive Malaysian equities to underperform against its peers.

“The consensus estimates reported that Malaysia’s corporate earnings growth is below 10% (in 2019), lower compared to Asia peers which are growing at a rate of 11% to 12%,” he said.

StanChart has projected the ringgit to trade against the US dollar at RM4.15 level by year-end.

“As the US dollar weakens, we believe the pound sterling and the euro will be the biggest beneficiaries,” said StandChart’s senior investment strategist Manish Jaradi.

Last week, the International Monetary Fund in its External Sector Report highlighted the US dollar was overvalued by 6% to 12%, based on near-term economic fundamentals.

The ringgit was last traded at 4.112 against the greenback last Friday.

According to Manish, the weaker dollar outlook will also encourage flows into EM assets.

Bank Negara Malaysia’s decision to maintain the Overnight Policy Rate at 3% at its recent monetary policy meeting did not come as a surprise for StanChart due to low inflationary pressure in the economy.

“We expect the rate to be unchanged for the next six months. The economy is not slowing to a level where the central bank has to do another immediate rate cut after the 25-basis-points cut in May this year,” said Chang.

The international banking group believes gold is a good way to hedge downside risks, especially given its soft greenback outlook and potential equity market weakness in the coming one to three months.

On a separate note, StanChart has rolled out SmartGoals — the first-of-its-kind digital platform in the country to offer market insights and wealth advisory, affordable and available to all clients irrespective of their net worth.

StanChart MD and head of wealth management Sammeer Sharma said investors are now looking for high quality and diverse insights that will enable better decision-making.

“Our advisory process involves bringing together diverse market insights with our own research to come out with unbiased recommendations that are tailored solely to our clients’ needs” he said.