Commodities support ringgit as equities gain on liquidity


THE latest cut in the Overnight Policy Rate (OPR) rate by Bank Negara Malaysia (BNM) last week will continue to divert money into liquid investments like stocks as the ringgit is lifted by higher crude oil prices as economic activity gains transaction.

FSMOne (Fundsupermart) assistant portfolio manager Jerry Lee Chee Yeong said political instability in the country and weaker crude oil and crude palm oil prices contributed to the depreciation of the ringgit against the greenback in the past few months.

The dovish stance of BNM with aggressive interest rate cut was another reason for the depreciation of the ringgit. The latest OPR cut was done on July 7, a 25 basis point cut which took the policy rate to 1.75%, a historic low.

“Although we do expect another potential rate cut by our central bank by the end of this year, we see limited downside risk for the ringgit and expect it to end the year around 4.15 to 4.25 level against the US dollar,” he told The Malaysian Reserve (TMR) last Friday.

Lee observed the ringgit is likely to be supported by the stabilising commodities prices as countries restarting economic activities.

“With more countries reopening their borders and economies, as well as the rather high compliance rate from OPEC+ producers on oil production cut, we expect crude oil price to stabilise at the current level,” he said.

Lee noted the risk of a second wave of Covid-19 infections would cap the upside of crude oil prices as governments may be forced to reinstate lockdowns.

“Investors should keep a watchful eye on the Covid-19 development and the OPEC+ deal,” he said.

As for the local stock market, Lee said over the past few months, retail investors have been the net buyers on Bursa Malaysia, supporting the local equity to recoup most of its losses in March.

“Capital from retail investors might not be as sticky, so we expect market volatility to remain high in months ahead. Over the short to intermediate time frame, the local equity market is currently in an uptrend but the risk of investing has increased tremendously compared to March or April given the expensive valuation,” he said.

The local equity market, he added, has rebounded from its low in March despite the declining earnings expectation.

“With the current situation, security selection is becoming even more important. At this juncture, we continue to hold a positive view on technology as well as the construction sector,” he said.

The FTSE Bursa Malaysia KLCI (FBM KLCI) hit a milestone on July after its trading volume reached a new record high of 11.81 billion securities traded, valued at RM4.36 billion.

Last Friday, the Securities Commission and Bursa Malaysia revised the ruling on circuit breakers for the benchmark FBM KLCI and the static and dynamic price limits for the FBM KLCI component stocks for the period July 20, 2020, to Jan 18, 2021.

Trading will be halted for the rest of the day as soon as the index falls by an aggregate of or more than 15% of the previous market day’s closing index. At present, the trigger point for stopping for the rest of the day is when the FBM KLCI drops by an aggregate of 20%.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the performance of ringgit and FBM KLCI has been quite decent thanks to the gradual reopening of the local economy.

“The country has been successful in containing the virus spread and it has been recognised by the global community. That says a lot about the government handling of the Covid19 and to some degree, it can be deemed as a confidence booster to business and consumer sentiment.

“Thus far, Malaysia’s Purchasing Managers’ Index has been favourable with June’s index has surpassed the 50-point demarcation line,” he told TMR yesterday.

He foresees the ringgit-US dollar exchange rate should appreciate and revised the year-end target from RM4.30 to RM4.25.

“The US Federal Reserve (Fed) has explicitly mentioned that the Fed Fund Rate which currently at 0.25% will stay low until 2022. So that should help the ringgit to appreciate overtime in view of wide interest rate differentials between the OPR and Fed Fund Rate,” Mohd Afzanizam said.

He maintained the FBM KLCI’s year-end target of 1,500 points.

“The index has been mostly bolstered by glove players at the moment. Bank earnings, especially net interest margin compression and concern on asset quality, should result in limited upside to the benchmark index.

“From a technical standpoint, the FBM KLCI is deemed to be an overbought position. Therefore, correction in the prevailing index is quite possible,” he said.

Mohd Afzanizam said crude oil prices have been gradually rising and this is very much in tandem with positive vibes on the gradual reopening of the economy.

“OPEC+ countries remain committed to keep the oil supplies stable. That could help stabilise the oil prices. The intermittent rise in new Covid-19 cases in some parts of the world has cast doubt on the sustainability of the reopening of the economy. Expect market participants will continue to watch in this space,” he said.