Financial Markets Committee announced several measures to develop onshore financial market to enhance FX market liquidity (details in BNM webpage).
Comment
In our opinion, the measures collectively are intended to correct the imbalances in onshore FX supply-demand which have persisted aftermath global financial crisis. Since 2011, BNM reserves were mainly contributed by portfolio inflows (i.e. rising foreign holdings in govt papers) while trade surplus, despite hefty, has not been converted significantly. This has caused ringgit to be highly sensitive and vulnerable to reversal of global capital flows as seen in taper tantrum (2013) and recent Trump-induced outflows.
Overall, we are positive on the latest measures:
Measures on export proceeds are expected to centralise FX at BNM to the tune of RM60bn equivalent per annum (based on trade surplus assumption of RM80bn/yr), representing a powerful avenue to build up reserves and enhance FX liquidity in the onshore market.
On flexibility of onshore ringgit hedging, we opine that the measures represent baby steps by BNM to liberalise and help develop domestic FX market, after tough measures two weeks ago to rein in offshore NDFs.
Commitments of market makers in the secondary bond market would enhance market liquidity and reduce incidents of sudden spike which causes market panic.
We expect the latest measures to further stabilize ringgit trading. However, ringgit trend will still be influenced by US dollar strength induced by Trump’s policies. Moreover, adverse developments in the euro area (Italy referendum, UK Brexit & series of elections in 2017) may continue to strengthen US dollar against other currencies.
In the short term, foreign investors may still view BNM measures as micro-managing and decide to stay away from Malaysian assets until re-rating catalyst emerges.
We maintain our ringgit forecast at RM4.20-4.50/US$ for the remainder of this year and RM4.10-4.40/US$ for 2017.
FBM KLCI Target
Maintain end-2016 FBM KLCI target at 1,680. We also maintain our end-2017 FBM KLCI target at 1,760 based on 15.5x (historical mean) one-year forward earnings.
Strategy
We do not expect major market reaction to the above measures. That said, there could be negative implications on export stocks from mandate on FX conversion and settlement in ringgit among residents (i.e. higher transaction cost).
Our market strategy remains unchanged. We continue to advocate defensive stance in stocks with earnings certainty and domestic-oriented catalysts to weather market volatility induced by Trump uncertainty.
Top picks are unchanged. Big Caps: Digi, Gamuda, Sime Darby, Sunway & Tenaga; Small/Mid-Caps: GKent, HSPlant, Matrix Concepts, SunCon & Time dotCom.
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