Interest rates to affect investor sentiment

An interest rate hike by Bank Negara Malaysia (BNM) would have an impact on investor sentiment but the outlook on the economy was not as bleak as some may think, said CIMB-Principal Asset Management Bhd chief investment officer Raymond Tang.

“Of course there will be some impact, but it’s not the end of the world. What happened 10 years ago was worse, inflation was about 15% and interest rates at about 12%. Now we’re facing a hike of about 10% to 20% (in interest rates), with inflation about 6% to 7%.

“The interest rate hike may seem high, but looking at where we came from, we are far from that extreme stress. Even without a hike, our interest rates are still very low compared to other regional neighbours,” he said at a media briefing here yesterday.

Investors generally keep an eye trained on interest rates in times of inflation. Rising rates will depress prices of bonds and interest-sensitive stocks. And market speculation is that the central bank may raise interest rates by as much as 50 basis points this year to curb inflation.

BNM said earlier this month that it had yet to consider raising the overnight policy rate (OPR) from the current 3.5%, even after raising its 2008 average inflation forecast to 4.2% from its initial estimate of up to 3%.

Elsewhere in the region, India’s central bank on Tuesday raised the repurchase rate and cash reserve ratio by 50 basis points each, to 8.5% and 8.75% respectively, after inflation hit a 13-year high in early June.

Earlier this month, Indonesia raised its key interest rates by 25 basis points to 8.5%, as did the Philippines and Vietnam, which has the highest benchmark interest rate in Asia, after raising rates to 14% from 12%.

On the outlook of the Malaysian market, Tang pointed out that valuations were not expensive with the stock market price-earnings ratio around 13.5 times currently and to reach 12 times next year.

However, he expects the market to be flat for the rest of the year, especially with the recent oil and power price hikes and escalating food prices. “I think the market is near bottom, not much more downside for this year. The recent low in March, I don’t think we can go below that unless something drastic happens.”

However, bright spots in the market remained. Tang reiterated that commodities such as palm oil were doing well, flowing in income for small holders.

At the briefing, Tim Dunbar, executive director of equities at US-based asset management firm Principal Global Investors, advocated that investors hold investments in global emerging markets as part of an asset allocation play.

Dunbar highlighted that emerging markets accounted for 25% of the global gross domestic product but only 12% of market capitalisation, giving it the potential to more than double.

“Diversification is important, the strength is now in commodities producing countries such as in Brazil. And we still think technology holds good relative value and so we think that countries that participated in the technology boom will continue to do well,” he said.

To a question on the impact of the political environment in Malaysia on investor sentiment, Tang said: “Politics is part of life in Asia, we’ve never experienced politics at this level before compared to Thailand and the Philippines which change governments more regularly.”

He said that the upside was that markets had priced these risks in already. The risk was that investors would exit the market in the worst-case scenario, which was an unlikely event.

Dunbar meanwhile said the real issue was whether investors were compensated for the risks taken.

“In Malaysia by the weighting that we have, we believe we are being compensated by the securities in companies that we buy that are Malaysian based,” he said. Principal Global has assigned a 2% weightage to Malaysia, higher than Singapore and India.

Principal Global invests US$19.5 billion (RM64.35 billion) in international equity assets, of which US$4.5 billion is dedicated to its emerging markets portfolio. Its portfolio gives the highest weightage to countries such as Taiwan, South Korea, South Africa and Mexico.

Companies it invests in include Samsung Electronics, Taiwan Semiconductor Manufacturing, South Africa’s MTN Group and Impala Platinum Holdings. - By Sharmila Ganapathy (The Edge Daily)

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