Ringgit may rise short term due to positive carry trades

This week, The Edge writes about carry trade in Malaysia and its prospects in the near term.

In a carry trade, investors borrow in countries like the US, where short-term borrowing costs are low. They would then purchase higher yielding assets like Malaysian Government Securities (MGS) to profit from the positive yield difference. 

This strategy relies on the stability of assets’ prices and exchange rates, since excessive movements can easily wipe out the profits of a carry trader.

The Edge analyzed several factors which seems to be working in favour of the carry trade in Malaysia.  

‘Fear’ Index at 2014 low 

To begin with, volatility in global financial markets is expected to be low in the coming months. This can be seen by the S&P 500 Vix index (Vix).

The Vix, which is also known as the ‘fear index’, is a widely-used indicator of the expectations of volatility. The higher the number, the more volatile or unstable investors expect the markets to be.

At the moment, the Vix is trading at about 12%, which is the near the lows of 2014. In contrast, the Vix peaked at 21.4% in February 2014. Despite the ‘sell in May and go away’ adage, the Vix indicates that investors have been relatively calm in May.

This works in favour of the carry trade because volatile markets tend to make investors think twice about being invested in the market. Instead, they are likely to withdraw their funds and hold cash. 

Apart from the Vix index, other factors which are discussed include the trading volatility of USDMYR, the spread of the Credit Default Swap on Malaysian sovereign debt and the potential rise in overnight policy rate by Bank Negara Malaysia.

Read more in The Edge this week.  

Looking beyond top line GDP growth

Malaysia’s Gross Domestic Product (GDP) grew an impressive 6.2% in the first quarter of this year, one of the highest first quarter (1Q) growth in the region. On a quarter-on-quarter basis, though, 1Q2014 growth is slower at 0.8%, compared to 4Q2013’s 1.9%.

The unexpected surge in 1Q GDP sparked off a slew of revisions in growth forecast for 2014, with projections averaging around 5.5%, compared to 5% before.

Is this strong growth sustainable?

In releasing the 1Q performance data, Bank Negara Malaysia guided that GDP performance in 1Q is “exceptional” and unlikely to be repeated in the subsequent three quarters.

Indeed, while the top line numbers are looking good, there are still pockets of weaknesses in the economy, which if not addressed in the coming months, will undermine the growth prospects of the country over the longer term.

Will domestic demand and export performance which are the main growth drivers of the 1Q GDP growth be sustainable moving forward? 

Some economists are concerned of the prospect especially amidst a period of rising inflation, high household debt and the impending interest rate rise by Bank Negara Malaysia which is likely to happen in July. 

With rising government spending and a budget deficit to tackle, the slack in public consumption is likely to be filled by private sector investments.  BUT can private investments deliver the figures? 

Read the full analysis in The Edge this week.

How our stock calls have fared

Over the months from Oct to Dec 2013, we analysed a number of companies listed on Bursa Malaysia.  Among them were a big capitalization company in Tenaga Nasional Bhd, two hugely undervalued, conservative, net cash and prudently-managed property development companies, namely Daiman Development Bhd and Matrix Concept Holdings, and China Stationery Ltd, a mainland Chinese company whose operations have been the subject of much suspicion.

Now that six months have passed, let us review how these companies have performed.

Company Name	Analysis and Date	Share Price (RM) then	Share Price (RM) as at 15 May 2014	% Change
Tenaga Nasional Berhad	BUY (9 Dec 2013)	10.78	11.98	11.13
China Stationery Ltd	SELL (4 Oct 2013)	0.23	0.12	(46.67)
Daiman Development Berhad	BUY (22 Nov 2013)	2.99	3.55	18.85
Matrix Concept Holdings Berhad	BUY (10 Oct 2013)	2.75	4.10	49.15

The stocks we were positive on have performed well. Even a large company like Tenaga has gone up by 11% in 5 months.

Within only six months, Daiman Development Bhd is up 19% and Matrix Concept by a whopping 49%.

In contrast, China Stationery Ltd’s stock price has all but collapsed. It now trades at 12 sen from 23 sen just seven months ago. 

We hate to say “we told you so”, but really, the signs were staring at our faces. To those of you who are still hanging on, hoping against hope, sometimes you must learn to let go. Cut your losses and move on, as there are always opportunities elsewhere.

This update is also to indicate a change in our view on Tenaga. The good news have all been factored into the stock price. Almost certainly, bad news will now dominate this company. Its fuel costs are higher as its coal-fired plants were hit by outages. 

Early retirement of older plants and bringing forward new plants, with greater reliance on more expensive gas fuel, will raise its production costs. Tenaga is likely to see its earnings peaking in 2014. It is time to say goodbye to this stock.

Weak property markets ahead

This week, The Edge predicts that home prices in Singapore will fall in the second half of this year, as developers begin to cut prices to move their unsold units.

Over the past 4 months, the take-up rate of fifty projects in Singapore, which have sold less than 50% in total, was less than 0.8% a month. Two projects have sold nothing since their launch.

The positive news is that the Singapore property market has depth and if the prices were to be reduced by 15% to 20%, the unsold inventories will move fairly quickly.

In Malaysia, home prices are definitely trending downwards as confirmed by the recently released Malaysian House Price Index. On a year to year basis, prices are up 8%. But on a quarter to quarter basis, there was no growth in the first quarter of this year.

In Selangor, prices fell 0.4%, with high rise residential units declining by 3.8%. Elsewhere, price increases were a small fraction of what it was previously.

Read The Edge this week for the complete analysis.

What happens when the party ends?

In the third and final installment on global capital flows, we argued that rising interest rates in Malaysia is inevitable and likely to happen soon. This will happen either preemptively, as a policy decision of Bank Negara Malaysia (BNM), to arrest asset bubbles and household debts or being forced into it as a result of capital outflow.

Raising domestic interest rates on our own, sooner rather than later, is clearly the right option.  We believe BNM will decide on this route as well.

US long-term interest rates have risen sharply and short term rates will inevitably rise.  The interest rates differentials between Malaysia and US are already trending downwards even based on short-term US rates.

We explained the consequences of the above on the stock market, the bond market, the property market and the Ringgit.

Read more in The Edge this week.

The Avira launch in Iskandar - better news

Tong's Take 
The Edge Malaysia 2014, Issue May 12-18

Better response to the soft launch of phase 1 Avira garden terraces in Medini last weekend was a much welcomed news for Iskandar Johor, which has seen a slowing momentum following the property cooling measures introduced late last year and the stricter mortgage lending rules.

Source : Avira's e-brochure from E&O

Since its soft launch, Avira has achieved 70% bookings for its 208 units of garden terraces.  The units are priced at an average of RM580psf and with a built up of approximately 2,200 sf, the average price for each terrace house was just below RM1.3million.

Avira is considered one of the more successful launches in Iskandar in recent days.

Why has Avira done well?

Using the earlier launch of Puteri Cove in Puteri Harbour as a comparison, we identified and elaborated on several possible reasons in the article for the differing market reception towards these two projects, which amongst others, include pricing, product and branding.

Despite this, Avira was expected to do better.  It is the last known project in Medini that involves the joint effort of the investment arms of the two governments; Khazanah and Temasek, and hence are likely to benefit from the enhanced investor confidence and potentially stronger buying interest on this project.  Its pricing is also relatively lower than the established neighbouring developments like Horizon Hills and Bukit Indah. These are signs that the property market in Iskandar has indeed softened.

Read more in The Edge this week as we shared on what next to watch out for in Iskandar. Stay tuned.