OVERVIEW

• With Brexit added into the mix of rising global uncertainty it gives more reason for the U.S. Federal Reserve to delay its next interest rate hike. The upside is that this could momentarily reduce outflow of capital from emerging markets and relatively stabilise their currencies.
• China’s economy seems to head for a cyclical rebound with the help of massive state-sector investment. But rising credit risk to pare down LT growth upside
• After a prolong slowdown, Malaysia’s economy to gradually pick up as GDP growth expected to bottom out at 4.0% YoY in 2Q16, bringing 1H16 growth to 4.1%.
• Since 1Q16 consumer sentiment has begun to turn around and private consumption expenditure is expected to contribute a larger share of GDP growth in 2Q16 and 3Q16 as exports fall short of expectations.
• Exports face a challenging 2H16 on a higher base for comparison and persistently weak global trade. Combined with lacklustre performance in 1H16 thus far, we expect exports to significantly undershoot market expectations and the official government forecast.
• Though Malaysia’s economy showed growing signs of resilience - with 3Q16 GDP growth projected to nudge up 4.2% YoY on the back of domestic demand – the current assessment for 2H16 growth outlook remains ambiguous. Hence, we revised our 2016 GDP growth to 4.0%-4.5% from 4.5%.
• Crude oil prices have entered a period of relative stability, with Brent crude expected to trade within US$40 and US$50 a barrel for the remainder of the year. If this range is maintained, it would help keep the fiscal deficit target of 3.1% of GDP.
• Inflation will be muted in 2H16 as GST-related price increases from 2015 have been fully reflected in the consumer price index (CPI). We revised our CPI forecast to 2.3% from 2.6%.
• Capital flows are expected to remain volatile in 2H16 as investors look to how events such as Brexit pan out. Global risk events may trigger portfolio rebalancing to less risky investments, but a more stable global outlook will increase the attractiveness of the local bond and equity markets.
• The ringgit is expected to strengthen as crude oil prices stablises but would be impacted by the Fed rate hike before year end. In 2H16 we see USDMYR to range between 3.90 and 4.20 and close the year at about 4.17.

Source: Kenanga Research - 20 Jul 2016