Saturday, July 26, 2014

S&P Upbeat On Malaysia’s Outlook

SOVEREIGN ratings agency Standard and Poor’s (S&P) is encouraged by the government’s announcement of the Goods and Services Tax (GST) and subsidy rationalisation programme.

S&P also expects Malaysia’s public debt to gross domestic product (GDP) ratio to drop to 2.9 per cent over the next three years. 

In a revised outlook from 3.8 per cent previously, S&P remarked on Thursday that Malaysia’s fiscal performance has improved more than expected. 

It said the government’s recent measures to reform subsidies and introduce GST at six per cent next year will help fiscal consolidation. 

“The government’s plan to balance the budget by 2020 is encouraging. However, its success depends on the initiatives to materially reduce the size of the total subsidy, the rationalisation of general expenditures and improvement of revenue collection,” it said in its latest outlook on Malaysia. 

S&P affirmed its “A-“ long-term and “A-2” short-term foreign currency sovereign credit rating, saying the stable outlook reflects its expectation for Malaysia over the next 24 months. 

The fiscal debt burden has been increasing since the government borrowed more for its stimulus spending in 2009. 

It expects net general government debt to peak at about 50 per cent of GDP this year, before declining gradually as fiscal consolidation efforts bear fruit. 

S&P said the percentage of foreign holders of ringgit-denominated Malaysia Government Securities rose sharply to 45 per cent last year. 

“Although foreign interest in local currency bonds offers a sovereign more funding diversification, high non-resident holdings leave the country’s capital market vulnerable to a sudden reversal in the flow of cross-border funds, which are often more volatile than domestic funds,” it warned. 

It expects stronger trade surpluses in the next two to three years. 

Malaysia’s strong external position is a result of years of persistent current account surpluses, although the narrow net external debt as a share of current account receipts turned positive for the first time due to the decline in foreign reserves. 

S&P said it may raise the sovereign credit ratings for Malaysia if stronger economic growth and the government’s effort to reduce spending, particularly in subsidies, reduce deficits further. 

It may lower the ratings if the government fails to deliver reform measures to reduce its fiscal deficits, increase the country’s growth prospects and prevent the external position from deteriorating. 

These reforms may include implementing the GST, reducing subsidies, boosting private investments, and diversifying the economy, it added.


Monday, July 14, 2014

Tech Earnings To Take Centre Stage

EARNINGS from some of the biggest United States technology companies will take centre stage this week, giving investors a chance to re-evaluate the sector’s health.

Big tech names set to report this week include Intel Corp and Yahoo Inc tomorrow; eBay Inc on Wednesday and Google Inc on Thursday. 

The tech sector has the highest projected earnings growth rate among the 10 S&P sectors for the second quarter at 12.3 per cent, its best quarter since the first quarter of 2012. This forecast marks a sharp rebound from a drop of 3.2 per cent just a year ago, according to a Thomson Reuters poll. 

Goldman Sachs analysts wrote in a note that the information technology sector “appears to be the most undervalued sector”, giving investors more reasons to be bullish on tech stocks. 

The implied earnings-per-share growth for the tech sector has been 5.4 percentage points above the S&P 500 on average over the past 10 years, but it is now just 1.0 percentage point above the benchmark index, according to the Goldman Sachs note.

 While the Dow Jones industrial average and the S&P 500 have hit record highs recently, the tech-heavy Nasdaq is still more than 700 points away from its all-time intraday high on March 10, 2000, suggesting to some investors that the sector may have more room to the upside. 

The tech sector’s earnings are “going to certainly be important because the market started to gain momentum as economic data got better”, said Quincy Krosby, market strategist at Prudential Financial, which is based in Newark, New Jersey. 

“We want to hear good solid numbers and if we get that from tech names, it will help.” 

Nine of the 13 sub-industries in the tech sector are expected to report higher earnings than a year ago, with semiconductors and semiconductor equipment having the highest growth rates within the sector, according to Thomson Reuters data. 

The Nasdaq is up 5.7 per cent for the year, while the semiconductor index is up 20.3 per cent. 

Among the 10 S&P 500 sectors, financials have the worst earnings forecast with a decline of 3.5 per cent from a year ago, according to Thomson Reuters data. Nine of the sector’s 21 sub-industries are expected to post a drop in earnings. 

Earnings from some of major banks this week will include JPMorgan Chase & Co and Goldman Sachs Group Inc tomorrow; Bank of America Corp on Wednesday and Morgan Stanley on Thursday. 

Analysts are expecting subdued results because a slowdown in revenue from mortgage refinancing and trading is offsetting gains from other areas like investment banking and money management. Higher legal, regulatory and compliance costs are also weighing on results. 

Wells Fargo & Co underscored some of those problems last Friday as the largest US mortgage lender reported a 39 per cent decline in revenue from that business. 

In addition to keeping a close watch on earnings, Wall Street will also tune in this week to what Federal Reserve chair Janet Yellen says when she makes a couple of trips to Capitol Hill. 

She is scheduled to testify on the US central bank’s monetary policy in a semi-annual appearance before the Senate Banking Committee tomorrow and the House Financial Services Committee on Wednesday. 


Friday, July 11, 2014

Bank Negara Raises Overnight Policy Rate by 25bps

KUALA LUMPUR: Bank Negara Malaysia (BNM) raised the overnight policy rate (OPR) by 25 basis points to 3.25% on Thursday, the first time since May 2011 with economists expecting the rate hike to address the potential rise in financial imbalances.

Alliance Bank Malaysia chief economist, Manokaran Mottain said the hike in the OPR was a "pre-emptive measure to prevent further disproportionate risk taking as well as reducing asset price misalignments". 

"While the central bank in previous instances had preferred to make use of macro prudential tools in reducing asset price bubbles risks, the rate hike will likely deliver greater traction in averting any excessive leveraging activities," he said.  
 BNM said the decision was made at its monetary policy committee (MPC) meeting as the latest economic indicators pointed to continued strength in exports and private sector activity in Malaysia. It also expected Malaysia's overall economic growth momentum to be sustained.
"The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 3.00% and 3.50% respectively," it said. "At the new level of the OPR, the stance of monetary policy remains supportive of the economy." 

BNM said going forward, the overall growth momentum was expected to be sustained while inflation has been relatively stable.  

"Exports will continue to benefit from the recovery in the advanced economies and from regional demand. Investment activity is projected to remain robust, led by the private sector." 

"Private consumption will be supported by stable income growth and favourable labour market conditions. The prospects are therefore for the Malaysian economy to remain firmly on a steady growth path," it said.  

BNM said inflation has been relatively stable as the effects of the price adjustments for utilities and energy continue to moderate. Demand driven inflation remains contained, it added.  

"Looking ahead, inflation is, however, expected to remain above its long-run average due to the higher domestic cost factors.  

BNM added amid the firm growth prospects and with inflation remaining above its long-run average, the monetary policy committee decided to adjust the degree of monetary accommodation.  

This normalisation of monetary conditions also aims to mitigate the risk of broader economic and financial imbalances that could undermine the growth prospects of the Malaysian economy, said the central bank.  

Alliance Bank's Manokaran said the MPC's decision to raise the OPR by 25bps was within expectation as well as market consensus.  

He pointed out that since the previous MPC meeting in May, financial markets had been influenced by this expectation.  

The ringgit rallied to RM3.172 against the US dollar on Wednesday, up 2.06% gain. At the close on Thursday, the ringgit was trading at RM3.182.  

"In the meantime, the rise in OPR will likely improve Malaysia's attractiveness amongst foreign investors, leading to stronger capital inflows, lower bond yields and an appreciating ringgit.  

"Looking ahead, we do not see the recently announced OPR hike to be the start of a monetary tightening process. At the new rate, the OPR remains accommodative of growth. In this regard, we expect the OPR to remain unchanged at 3.25% for the rest of 2014," he said.