RHB: Malaysia will serve as safe haven investment destination in 2021

KUALA LUMPUR (Dec 9): Malaysia will serve as a safe haven investment destination in 2021 amid volatility and risk conversion taking place at the global level, according to RHB Banking Group.

Its chief economist and head of market research Dr Sailesh Kumar Jha said RHB held a contrarian view to the general financial market expectation that if volatility were to pick up in the global market amid shortages of the US dollar in the region, there would be large outflows from Malaysia.

“In our model, in the event of any pick-up in volatility, the currency depreciation built in for the ringgit is a strong buffer between real interest rate differentials between Malaysia and the United States, and that is what cushions us.

“We believe that is likely to happen and also there is enough sizeable domestic investor base, at least in the fixed income bond market, that basically pre-empts sizeable capital outflows on a sustained basis,” he told a press briefing in conjunction with the launch of RHB’s flagship research publication, Path Finder – Separate the Noise from Reality, here today.

Jha said Malaysia’s domestic and external liquidity condition in the capital market was resilient and he was optimistic the government would come to terms with the fiscal consolidation once the headaches behind the Covid-19 pandemic were done with, hopefully by next year.

“We continue to favour long dated government bonds and securities in the Asian region. In Malaysia, we like the 15-year government bond as it would likely be supported by the government.

“We do not care about Fitch Ratings’ downgrade of Malaysia’s sovereign rating from A- to BBB+ as it is inconsequential and we believe S&P Global Ratings and Moody’s are unlikely to follow suit,” he said.

Looking at the Asian level, he said RHB also found that Malaysia stood out because in a period of a pick-up in volatility and dollar liquidity squeeze, the capital outflow from Malaysia would be much less.

Against its ASEAN peers, he noted that it was difficult to compare with Indonesia, Thailand or the Philippines as these countries’ capital markets across equities, bonds and currencies were less liquid and essentially had less variety in instruments to play with.

“As for the Singapore capital market, we have little data on it as the country’s authorities do not publish foreign holdings in the market. But we have seen that during risk conversion and dollar liquidity squeeze, the Singapore capital market was impacted tremendously in 2020,

“Correlatively against ASEAN peers, Malaysia is number one,” he said.

On the global view, he said the financial market was in an euphoric state with a V-shape economic recovery; hence he anticipated that risky asset prices such as emerging market currencies and emerging market bonds would continue the current pace of pick-up for some time.

He said RHB expected global growth to surprise on the downside and forecast that growth in Asia would be below consensus estimates.

He forecast the US dollar to rebound, contrary to consensus belief on further depreciation in 2021 by three per cent against the G10 group of currencies and two per cent versus Asian currencies.

According to him, the upside of the greenback against Asian currencies is driven by a few catalysts, one of which is the US trade deficit. Although it always had been on a deficit, the quantum mattered, he said.

“The US trade deficit has deteriorated since summer this year to about US$62 billion from a low of US$65 billion in August compared with the average trade deficit of around US$40 billion.

“We believe that heading into the first quarter, it will go back to where it came from, at around US$40 billion,” he said.

According to him, the second aspect of the dollar is that there is a strong relationship of the global economy to the dollar in that the currency does better when the global economy decelerates.

RHB, he said, viewed the decelerating of global growth in the first half of 2021 as positive for the dollar.

In Asia, he noted, it would work in a similar fashion, whereby if growth were to decelerate in the region, then the Asian currencies would weaken against the US dollar.

On the ringgit versus the US dollar, he said the local currency “remains steady as it goes” and was projected to trade in the 4.10/20 range for the first half of next year.

On Malaysia’s economy, Jha highlighted that RHB downgraded its forecast on Malaysia’s 2021 Gross Domestic Product (GDP) growth to 6.3% from 7% but considered the number as still robust.

This was on the back of slowing domestic consumption into the first half of next year as unemployment increased as a result of the Covid-19 pandemic, he explained.

And as an open economy, with exports relying on electronics and pharmaceuticals, the tailwinds and global demand were seen to start decelerating which would affect the GDP, he added.

Source: TheEdgeMarkets