Vaccine, stronger crude oil and energy prices, and fund inflows will be supportive to the local note

By FARA AISYAH / Pic TMR

THE ringgit is expected to continue strengthening to the 4.00 level next year on the back of a recovering economy helped by the distribution of vaccines to combat the Covid-19 pandemic, stronger energy prices and fund inflows.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the bank is quite constructive on the ringgit next year.

“The approval by the UK government granted to Pfizer Inc and BiONtech SE suggests the vaccine would be made available next year. This will allow the reopening of the economy to be more forceful, perhaps in the second half of 2021. As such, we are expecting the ringgit to hit 4.00 by the end of 2021,” he told The Malaysian Reserve.

He added that stronger crude oil and energy prices driven by rising demand from a pick-up in economic activity will be supportive to the ringgit as well.

Mohd Afzanizam said the decision by OPEC to extend production cuts next year would be critical for crude oil prices.

MIDF Amanah Investment Bank Bhd (MIDF Research) projected the ringgit to appreciate further to 4.04 against the greenback by year-end, with an average of 4.04 per US dollar.

“We expect the ringgit to strengthen from higher oil prices, as well as increase demand in the equity market given the low interest-rate environment in advanced markets,” MIDF Research economist Abdul Mui’zz Morhalim said at the MIDF 2021 market outlook virtual presentation yesterday.

The research firm said Malaysia saw deflationary pressures this year from the low oil price and slowdown in economic activities. As such, the ringgit appreciated to 4.069 against the US dollar. The ringgit was last traded at 4.07 against the greenback yesterday.

On Nov 30, 2020, the FTSE Bursa Malaysia KLCI (FBM KLCI) closed at 1,562.71 points, recording a 1.6% loss on a year-to-date (YTD) basis.

“This, however, masks the fact that it was a very volatile year. At the height of the panic caused by the Covid-19 pandemic and other headwinds, FBM KLCI fell to its

lowest of 1,219.72 on March 19, representing a 23.2% decline from the beginning of the year,” MIDF Research noted.

Comparing the trough of the FBM KLCI this year with the close on Nov 30, 2020, it represented a 28.1% increase, says the research house.

It said the Malaysian stock market is also seeing a YTD outflow of RM24 billion given the current global situation.

In terms of month, the fund out- flow peaked in March as the global investing community was spooked by the declaration of Covid-19 as a pandemic by the World Health Organisation.

“However, it has been on a downtrend since then, and we expect there could be a possibility of foreign inflows in 2021, especially with the recent appreciation of the ringgit,” MIDF Research added.

MIDF Research targets FBM KLCI to average 1,700 points in 2021, at an implied price-to-earnings of 17.5 times, which equates to 0.5 standard deviation above its 10-year historical average to factor in the expected recovery in the economy and improved investors’ sentiment.

Bank Negara Malaysia is also expected to increase its Overnight Rate Policy by 25 basis points in the fourth quarter of 2021 as the local economy gains from the recovery in the global economy with the availability of Covid-19 vaccines.

“There are still challenges on the Covid-19 pandemic, but the availability of vaccines will further boost confidence that the global economy will start positive growth starting from 2021,” Abdul Mui’zz said yesterday.

Thus, the research firm expects Malaysian economy to rebound by a 7% year-on-year (YoY) growth in 2021, driven by private consumption and business expenditures, against a forecast of a 4.8% GDP contraction this year.

“We are expecting external demand to continue to provide support for Malaysia’s exports, in addition to the government’s support towards the economy,” he said at the MIDF 2021 market outlook virtual presentation yesterday.

He said Malaysia’s trade is expected to pick up in 2021 on the back of global demand recovery.

Exports are projected to grow by 5.3% in 2021 from -3.5% this year, and imports to recover and grow by 6% compared to a 5.1% decline in 2020.

Abdul Mui’zz said the unemployment rate in 2021 is predicted to decline to 3.8% from 4.3% this year as a result of the recovery in the general economy.

“Apart from the improvement in the labour market, consumer spending will also increase, supported by government initiatives such as the Bantuan Prihatin Rakyat and Employees Provident Fund withdrawals, which will increase consumer disposable income.

“On the supply side, we expect all sectors to record a positive growth next year,” he said.

He added that the manufacturing sector will recover on growing demand from both domestic and international markets, while the construction sector will rebound strongly after a sharp fall this year due to the continuation of infrastructure projects.

MIDF Research expects commodity-based sectors to benefit with commodity prices expected to be stronger: Brent crude oil price forecast to average at US$51 (RM207.84) per barrel and crude palm oil at RM2,700 per tonne.

Inflation is anticipated to rise to 2.2% YoY, supported by stronger demand as the economy recovers.

MIDF Research said recent developments point to a brighter outlook for the capital market in the near future.

“Baseline scenarios that guide its positive outlook are liquidity situations that remain ample, but we expect a rate hike in the final quarter due to normalising price pressure.

“The vaccines would bring an end to the pandemic, hence lower macro/earnings risks but also lessen monetary accommodation,” he added.