Fresh tariffs threat dulls economy opening impact on local exchange

The re-escalation of a trade war or the heightening of the geopolitical risks could jeopardise any economic recovery


WEAK manufacturing data and the threat of reignition of trade hostilities between the US and China unnerved investors, in addition to the weaker global economic activity due to the Covid-19 pandemic.

The fall in the manufacturing Purchasing Managers’ Index (PMI) reading to 31.3 in April from 48.4 in March and the threat by US President Donald Trump to introduce new tariffs on China saw investor sell-off with the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) ending the trading down 31 points or 2.2% at 1,376.59.

The latest IHS Markit Ltd’s survey on Malaysia manufacturing PMI revealed that the local manufacturing sector came under heavy pressure during April as measures implemented to tackle the spread of Covid-19 caused firms to either suspend production or operate well below full capacity.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said a fresh trade war between the US and China is a high possibility as remarks by the US officials with regard to the origination of Covid-19 is a serious allegation.

“At this juncture, the re-escalation of a trade war or the heightening of the geopolitical risks could jeopardise any economic recovery. Export-oriented industries would be vulnerable,” he told The Malaysian Reserve yesterday.

Nonetheless, Mohd Afzanizam still believes the FBM KLCI would linger close to 1,400 points as the government and the central bank have been supportive of the economy.

The gradual lifting of Movement Control Order (MCO) measures will help kick-start economic activities but a sustained rise in new Covid-19 cases and the renewed concern on the trade war between the US and China could negatively impact the benchmark’s trajectory, he added.

Independent financial consultant and investment analyst Leong Hoe Kit said the threat by Trump to begin imposing additional tariffs on China is not unexpected as the earlier trade war was never really resolved entirely.

He said the “Phase 1” deal signed by the US and China on Jan 15, 2020, was a bright spot for world trade but it was only the beginning of long negotiations between the two large trading nations.

“A trade war is never good for global capital markets. In the long run, it will have negative repercussions on every type of business as world trade shrinks further.

“In the short term, there could be a pocket of opportunities in sectors like technology, furniture and certain other industries relocating production facilities away from China to other countries like Malaysia,” he said.

However, he added that as it currently stands with many businesses already affected by the Covid-19 pandemic and the crash in crude oil prices, it is questionable whether any short-term benefit will be realised if there is a sudden escalation in the US-China trade war.

Hong Leong Investment Bank Bhd in a note yesterday said the local equity market is likely to experience a choppy session this week in anticipation of a poor upcoming May reporting season and renewed US-China trade tensions, coupled with the concern of new wave of infections with the government’s decision to ease the MCO.

“The downside risk may be cushioned by expectations of another Overnight Policy Rate cut today and a positive technical breakout above 50-day simple moving average line last Thursday.

Aviation-related stocks like AirAsia Group Bhd, AirAsia X Bhd and Malaysia Airports Holdings Bhd could witness some selling pressures after Berkshire Hathaway Inc disposed entirely of its positions in the US airline industry due to Covid-19, it said.

Mohd Afzanizam said the ringgit value against the greenback should linger around 4.35 in the immediate term as the risk-off mode would lead to higher demand for the safe-haven currencies.

Meanwhile, Leong believes the ringgit is highly correlated to oil prices aside from the strength of currencies of Malaysia’s major trading counterpart nations.

“I think the ringgit will hold at the current level of between 4.30 and 4.40 per US dollar if the Brent crude oil can maintain its price between the range of US$23 and US$28 (RM99.36 and RM120.96) per barrel next week,” he said.