Development

• Ringgit depreciated against the US$ to a low of RM4.3875/US$ before settling at RM4.3418/US$ after BNM reinforced its measures to prohibit facilitation of ringgit NDF.

Comment

• The surge in volatility of ringgit with sharp depreciation bias was mainly induced by aversion of Trump policy risk:

• Full execution of Trump policies (fiscal expansion, trade protectionism, etc.) would result in sharp contrast of US growth outlook improvement vs. EM outlook, prompting reversal of capital flows and unwinding of carry trade.

• While Malaysia may not be directly targeted, there would be negative spill-over if Trump comes harsh on China given Malaysia’s recent closed link with China. Malaysia is also a key loser as Trump is not supportive TPPA.

• Besides, Malaysia is also facing other headwinds:

• High foreign bond shareholding (Sep: 35.7% of total). We note that there is a RM11bn GII maturing on 15 Nov.

• Trump’s energy policy (self-independence) is negative on crude oil price, which is in turn negative for Malaysia.

• On a positive note, BNM’s swift action to reinforce its FX measures had managed to tame the panic FX market. Rebound of 3Q16 GDP growth could help to relieve concern on growth outlook hence lesser likelihood of OPR cut.

• Pending clarity from Trump on his foreign relations and trade policy, we now expect ringgit to undergo volatile trading with weakening bias. We lower our ringgit forecast to RM4.20-4.50/US$ for the remainder of this year and RM4.10-4.40/US$ for 2017. We also note that other than the GII maturing tomorrow, the next MGS maturity will be in Feb-17 and Mar-17 (RM8.75bn & RM10.5bn respectively).

Impact

• We take stock of the implications of strong US$ on sectors and stocks under our universe (details in Appendix ):

• Positive
  • Resource-based (i) Rubber products (Neutral) & (ii) Wood-based (Overweight) – majority of revenue in US$ but large portion of cost in ringgit;
  • Technology (Neutral) – products sold in US$ while part of costs are in ringgit; &
  • Gaming (Neutral) – revenue from US operation.
• Negative
  • Automotive (Underweight) – higher cost of imported materials & CKD/CBU costs;
  • Power (Overweight) – higher coal cost & US$ debt;
  • Aviation (Overweight) – higher fuel cost, loan; &
  • Telco (Neutral) – Inflated IDD costs & US$ debt.
  • Consumer (F&B) (Neutral) – COGS in US$. Ultimately higher ASP will dampen consumer spending.
• While market may continue to react to the strong US$, we caution that export stocks may still be affected Trump’s anti trade sentiment. Technology sector is more vulnerable to any trade policy change compared to resource-based sectors.

Source: Hong Leong Investment Bank Research - 14 Nov 2016