Ringgit to remain weak despite recent FTSE Russell’s decision

FTSE Russell’s decision may provide some relief to the bond market


THE ringgit is expected to remain weak in the near term despite FTSE Russell’s decision to keep Malaysian government bonds in the World Government Bond Index (WGBI).

Analysts await for catalysts such as Budget 2020 and market-sensitive economic data from the US and China this week to provide leads while awaiting progress on trade talks between the two economic powers.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the mood on the ground was reflected in the investor pessimism observed in the local equity market.

“Perhaps the market is adopting a wait-and-see attitude in the face of trade war uncertainty,” he said.

Last Friday, reports said the White House was considering investment restrictions on China including delisting of Chinese stocks from US markets and limiting government pension fund’s investments in the Chinese market.

The move may compromise the prospects of a favourable outcome of the trade negotiations which are expected to take place on Oct 10 and 11.

“In a nutshell, there are not many catalysts to move the market, although China’s official Purchasing Managers’ Index for manufacturing rose to 49.8 points in September from 49.5 in August,” he told The Malaysian Reserve yesterday.

MIDF Research, in its weekly money review yesterday, stated the ringgit is expected to continue to depreciate due to Malaysia remaining on FTSE Russell’s watch list pending a fresh review in March next year.

Analysts estimated US$5 billion (RM20.95 billion) in outflows from the local debt market if Malaysia was excluded from the index.

“The Malaysian economy, however, remains in positive position amid solid macro fundamentals. We maintain our call on the ringgit to average at RM4.12 and register year-end target at RM4.10 in 2019,” the research firm noted.

UOB Global Economics & Markets Research, in a note last Friday, stated that ringgit-denominated bonds were sold-off last week ahead of the FTSE Russell announcement and due to the cautious mood surrounding US-China trade talks.

The Malaysian government securities (MGS) yield curve steepened following the sell-offs but UOB stated foreign investors may deem the benchmark three-, five- and seven-year MGS yields at 3.14%, 3.28% and 3.38% respectively as attractive in the current low-interest-rate environment.

“We believe Malaysia’s stable macro fundamentals and “A-” rated sovereign ratings provide underlying support for domestic bonds. Going forward, we expect the US dollar ringgit exchange rate to continue to move alongside US dollar/Chinese yuan as we keep our view of a modestly higher level of RM4.19 by end-2019 and RM4.26 by mid-2020,” it said.

Mohd Afzanizam opined the FTSE Russell decision may provide some relief to the bond market and foreign fixed-income managers could buy local bonds due to the undervalued local unit.

“The case for lower bond yields is quite visible as the Overnight Policy Rate (OPR) is anticipated to be reduced further by 25 basis points at the upcoming Monetary Policy Committee (MPC) meeting in November. Additionally, the ringgit is undervalued from a real effective exchange rate sense,” he said.

BIMB Securities Research said the ringgit is unlikely to benefit from lower US interest rates in a note yesterday.

“The ringgit has weakened against the dollar to RM4.19 currently versus RM4.13 at the end of 2Q19, despite lower US rates this year. We think the ringgit may not see an immediate inverse reaction to lower US interest rates,” it stated.

BIMB Securities noted the lack of catalysts to push the ringgit higher against the greenback will have a telling impact on foreign flows into the local equity market for the rest of the year.

“The rise in bond prices as yields decline suggests we are heading for lower returns in the next several quarters for equities as slower economic growth and threat of recession weigh heavily on the markets,” the research firm noted.

Mohd Afzanizam said the tabling of Budget 2020 next week should provide more clues on how economic growth would prevail going forward.

“There is hope the government would adopt expansionary fiscal policies. If that happens, it could lift market sentiment,” he said.

He expects the construction sector to be the main beneficiaries from the government move to bump up its development expenditure in Budget 2020 which is set to the announced on Oct 11.