As we head into the 2H2018, we have the US midterm elections added with ongoing trade policy, global central banks’ activities, US Fed rate hike, emerging market debt crisis and political noise. They will be the key focal points that may shape financial assets. We expect the markets to demonstrate a more meaningful volatility should inflation cycle pick up, central banks become more aggressive than markets currently anticipate and meaningful policy surprises.

While global economic challenges remain, we expect the global GDP to grow around 3.6% in 2018. The US remains strong despite trade war noises while we are looking at the ECB ending the QE by end-2018. Meanwhile, the story of BOJ normalisation could creep up as we move along the year should data turn more exciting. And despite expecting some adverse knock on effect on the emerging market growth due to debt crisis, growth on the whole will remain sustainable.

From the start of 2018 until now, we are being bombarded with various issues such as trade war, rising interest rates, emerging market crisis and politics. But with sturdy global GDP and corporate earnings growth, we continue to maintain our view that an asset class like equities will remain attractive. We are more balanced on equities while maintaining a “cautious” view on fixed income.

On the currency, we believe the current US$ rally somewhat lacks fundamental support as it will be weighed on issues such as twin deficit. Meanwhile, we feel euro will bounce back from the noises due to political risk and ECB’s dovish outlook supported by the storyline of tapering QE. As for the GBP, it will remain under pressure from the Brexit noise and hence it will be more of a tactical play. The Yen will stay range bound on the back of BOJ’s stable policy besides likely to experience a sell-off as the “risk-on” sentiment emerges.

MYR’s vulnerability will depend on the back of the ongoing global uncertainties with the upside likely to be muted by the domestic economic growth, stable inflation, positive real returns and a neutral monetary policy expected to be maintained by BNM which means the Overnight Policy Rate (OPR) will remain unchanged at 3.25% for the rest of 2018. Besides, a slight weakening of the US$ will also provide some comfort on MYR.

But the challenge on MYR will arise should there be a contagion effect from a risk of potential EM debt crisis that could see MYR weaken between 5% - 10% or a rate cut by BNM on the current 3.25% OPR despite having ample room to reduce the policy rate and maintain positive real returns since such move is against the global monetary policy tightening cycle and cause some degree of reversal flow of funds due to interest rate differential. But the outflow could be mitigated with stronger inflows into bonds and equities. Thus, we can expect about 1% - 2% upwards pressure on MYR.

Source: AmInvest Research - 11 Jul 2018