KUALA LUMPUR: Bursa Malaysia will be among the emerging market beneficiaries if the US Federal Reserve (Fed) lowers interest rates by at least once more by end-2019, according to Standard Chartered Bank Malaysia Bhd.
Managed Investments and Products Management head Danny Chang said market players were expecting a nearly a 100% chance of one Fed rate cut, and a 93% probability of two, by end-2019.
“Historically, when there is a US Fed rate cut which will not lead to a recession in the country, which is what we expect, it will be good for emerging equity markets, including Bursa Malaysia,” he told reporters on the sidelines of the Standard Chartered’s Global Market Outlook for the Second Half of 2019 briefing here today.
However, Chang admitted that Northeast Asian emerging markets such as Hong Kong, China and South Korea would benefit first, subsequently followed by Bursa Malaysia due to the local bourse‘s higher valuation and the low beta nature.
He added that the lower corporate earnings in Malaysia, which grew less than 10% as compared with 11-12% registered by Northeast Asian markets thus far also made the local exchange less attractive.
“It is not the government’s policies or political risks that affect the Bursa Malaysia, but (because) the local equity market is still expensive compared with others,” he said, adding that the benchmark FTSE Bursa Malaysia KLCI’s (FBM KLCI) price-to-earnings (P/E) ratio currently stood at about 16-17 times, much higher than the 10-11 times P/E ratio of Northeast Asian markets.
On the Overnight Policy Rate (OPR) adjustment, Chang said Standard Chartered expects Bank Negara Malaysia to maintain the rate at the current level of 3% at year-end.
“The economy is not slowing to a level where the central bank has to do another immediate rate cut after 25 basis points cut in May this year,” said Chang.
However, he said the central bank could cut the rate of the OPR if it wanted to mainly due to the low inflation rate in the country.
On the ringgit’s performance, Standard Chartered projected the local unit to trade at 4.15 level against the US dollar by year-end despite expectations of the weakening of the greenback following the Fed rate cuts.
Chang said the weaker forecast was due to the anticipation of lower foreign inflows as compared with the Northeast Asian markets.
“The saga of Malaysian bonds to be removed from the FTSE World Government Bond Index (WGBI) in April this year had also caused some restrictions in foreign inflows,” he added.
On the global front, the bank said it continues to have a preference for equities over bonds, and emerging market and corporate bonds over developed market government bonds.
“Within equities, we have a tilt towards the US,” it said in a statement today.
