Stronger ringgit by year-end

Publication: NST

Date of publication: Jan 27, 2014

Section heading: Business Times

Page number: 016

Byline / Author: By Kamarul Yunus

KUALA LUMPUR: CONTRARY to consensus estimate, Kenanga Investment Bank (Kenanga IB) sees the ringgit strengthening against the US dollar at the 3.09 level by end-2014.

Its head of research Chan Ken Yew said Kenanga still believes that the first half of 2014, or at least the first quarter of this year, could be relatively better compared with the second half because it expects interest rates for both Malaysia and the United States to remain unchanged this year.

"As such, as long as the monetary base continues to expand in the US by virtue of low interest rate, liquidity will remain ample.

"On the back of this assumption, we expect the ringgit to strengthen to RM3.09 against the US dollar by end-2014 as opposed to a consensus estimate of RM3.25, on capital inflows back to the region," he said in his presentation at Kenanga's Feng Shui and Market Outlook Talk 2014, here, on Saturday.

Speaking to reporters later, Chan did not rule out that Asean countries, including Malaysia, are likely to see the return of foreign fund inflows in the second half of the year, especially with the assumption that there is no change in interest rates both in Malaysia and the US.

Chan said the ongoing political tension in Thailand and Indonesia will pull investors away for a while and could pave the way for the depreciation of both currencies (ringgit and US dollar), tagging along other regional currencies.

"However, once this scenario settles down, the funds will actually flow back faster into the region," he said.

Chan said the domestic financial market is flush with more than RM300 billion in excess liquidity in the banking system.

Furthermore, he said, there is potentially more liquidity being channelled into the equities market.

Chan said the interest rate in the US is not likely to be changed this year. "If there's any change, it will only be in 2015."

He said the implementation of the goods and services tax (GST) should further strengthen Malaysia's sovereign rating, attracting more foreign funds.

Chan said the FTSE Bursa Malaysia KLCI (FBM KLCI) could potentially rally before the implementation ofGST, judging from the trends in Australia and Singapore.

"In addition, our simulation study also suggests that reward-to-risk ratio favours the upside, more than 40 per cent to 1,880 level for now," he said, adding that Kenanga IB's end-2014 FBM KLCI target is 1,890.

On Malaysia's economic outlook, Chan said with the government's subsidy rationalisation programme, the country's fiscal position will improve. "This may also give support to the enhancement of the sovereign rating, hence strengthening our currency," he said.

On Kenanga IB's top picks by sector, Chan said projects mostly introduced under the Economic Transformation Programme, particularly in oil and gas and construction industries, would enhance private investment.

"The expectation of higher crude palm oil (CPO) prices this year will also boost investor interest in Malaysia. We foresee the average price of CPO increasing to up to RM2,800 per tonne from RM2,400 per tonne last year, on the back of strong demand for biodiesel in Indonesia, which will reduce the supply in the market.

"It will benefit Malaysia because we cater to this niche segment," he said.