Volatility likely in second half of the year

Publication: NST

Date of publication: Apr 1, 2014

Section heading: Business Times

Page number: 006

Byline / Author: By Rupa Damodaran

SUBANG JAYA: Volatility is expected in the second half of the year ahead of the projected increase in interest rates by the United States Federal Reserve, which would likely lead to a sell-down in the region, Kenanga Investment Bank said.

On the domestic front, inflationary pressures are on the rise and the introduction of the goods and services tax (GST) in April next year would see the Consumer Price Index rising to higher levels.

"The subsidy rationalisation and high cost of living do not warrant an interest rate hike this year, although there is still a little chance (to do so) if the outflow is too large," said head of research Chan Ken Yew at the its global outlook seminar on Saturday.

The price increases for fuel and electricity are due to cost-push inflation with reduced level of consumption and the overnight policy rate should remain at three per cent.

Malaysia's fundamentals remained strong despite a weaker ringgit, he said.

"Coupled with the ample liquidity condition, with excess liquidity of RM290 billion, as at end January, we have better certainty in the market direction for the first half of the year but we continue to believe that the second half could be more challenging," it added.

The research house has revised its year-end target for the ringgit against the US dollar to RM3.21 from RM3.09 previously, due to the earlier timing of the quantitative easing tapering.

"Nevertheless, the government's fiscal consolidation path would lead to an improvement in the country's ratings, which would lend some strength to the ringgit."

While the ringgit is expected to weaken further in an average of RM3.25 against the greenback, the sectors that have attracted a lot of investing interest are gloves, shipping and electrical and electronic.

The implementation of the GST is expected to be the turning point for a re-rating in Malaysia.

In its growth outlook, it said improvement in the global economy and domestic growth will push the gross domestic product growth to between five and 5.5 per cent this year from 4.7 per cent in 2013.

On the equity market outlook, Chan said the market will likely deliver a decent upside with the FBM KLCI anticipated at 1,890 by year-end, with a potential of 2,020-level by end-2015.

Although the rubber gloves stocks under its coverage have performed poorly, Kenanga expects them to recover and outperform in subsequent quarters. It is also overweight on the oil and gas sector.