Brace for volatile 2014: RHB Research

PETALING JAYA (Dec 13, 2013): Investors in emerging markets including Malaysia, may have to live with volatile short-term capital movements from time to time in the year ahead, said RHB Research Institute Sdn Bhd.

That's because the guessing game on the timing of the US Federal Reserve's (Fed) stimulus cuts will likely remain a key focus of global investors next year.

"As the financial market is a key component of the US economy, the last thing the Fed would want to do is derail it. As a result, the timing of the quantitative easing (QE) tapering has become, more than ever, data dependent and all these will imply sustained market volatility in the year ahead," said RHB Research in its Market Strategy 2014 report yesterday.

The research firm is of the view that the longer the US delays its QE tapering, the more painful the hangover would be for emerging markets including Malaysia.

RHB Research noted that this was evident from June to August 2013, when RM27.5 billion of foreign money in the fixed income market and RM10.6 billion in the equity space exited the country on the first sign of QE tapering.

"While foreign funds returned to the country after the Fed decided not to begin QE tapering in its September Federal Open Market Committee meeting, the risk of capital outflow is still significant given the high foreign holdings of financial assets in the country," it said.

"As the timing of the US QE tapering is still a moving target, we expect the global repricing of risks to continue each time expectations of it materialising resurface.

"Still, we expect the global economy to experience a more synchronised recovery in 2014, while the Malaysian economy is poised for a cyclical recovery," it added.

Meanwhile, RHB Research said the improving growth outlook in advanced economies and a more synchronised global recovery augur well for Malaysia, which will likely experience a cyclical economic recovery in 2014.

It foresees economic growth to pick up to 5.4% next year, from 4.7% estimated for 2013.

"This augurs well for corporate earnings, with the normalised net earnings per share growth of the FBM KLCI benchmark projected to improve to 7% in 2014 and 10.1% in 2015, from 4.1% estimated for 2013," it said.

RHB Research is raising its end-2014 FBM KLCI target to 1,940 points based on 15.5 times one-year forward earnings, from 1,910 points previously, largely on account of the upward revision in earnings.

"Sector-wise, we are 'overweight' on oil and gas, construction, banking, plantation, timber, rubber glove, media, utilities, aviation and non-bank financials," it said.