We expect to see higher net profit after rates go up in January for Malaysian banks. Apparently it causes an adverse effect followed by loan growth contraction. CIMB has the data to look at the industry in the report below.
We always thought that the ECRL would be the first in line to be scrapped and never had the slightest fear that MRT3 would be scrapped. It seems though under Tun M’s leadership, anything could happen.
Anyway, here’s a report from RHB where the research house assesses the impact of project cancellation that would impact the local construction companies who got beaten down badly these few weeks.
Bloomberg deliberately show to us this chart where the yields a were nearing 2008 high when it was on the brink of the Global Financial Crisis. They love showing highly graphical pieces of data or charts that play with emotions telling you that something is brewing especially when markets are choppy.
They love to pass the message to you subliminally asking you to think for yourself what you should do during these choppy times. Therefore, being a well-informed investor is important where you should be able to identify these issues as noise in the markets.
Yield and Markets
Yields can be a sign of bad economy but also good economy.
When a country’s economy is bad for example when there was the recent scare in Russia on sanctions, we see yields spike due to the uncertainty and this the most common phenomenon of rising yields.
But at times when the economy is good, yields go up as well because there are just too many investors seeking the same pile of good stuff to put money into.
Selling in the stock market can happen concurrently when yields rise. We see in these couple of weeks because equity money makes its way into the bond market assuming that bond has more of a locked in gain and higher in terms of stability compared to equities.
For an investment manager, you could easily buy US$ 1 billion of bonds easily but not quite for equities as you would shake the counter by quite a bit.
Yields are A Funny Story
Yields somewhat possess the goldilocks behavior. It shouldn’t be too hot (high), too cold (low) but everything has to be just right. 3% on the 10-year yield for US Treasury is what many investment manager says a psychological barrier.
Take our MGS 10 year yield alone, the number was 3.5% during the 2016’s low and 4.2% at the current moment. Obviously when 1MDB’s non-sense came out it spike to 4.4% which typically reflects fear and credibility for the Malaysian government.
Comparing that to what it is now, the economy had turned much stronger and the ringgit had stabilized. Investors are seeking MGS once again and even liquidating some equity assets to be placed into the bond market.
Yields at 2008 High?
We certainly think that the Bloomberg’s graphical was over-proposing that bad times are coming. The reason we are seeing this number and it’s not alarming that what it was in 2008 was indeed we are at different times.
Let it be QE’s money being released into the system and never being able to be recovered, the investment community as a whole are definitely twice as rich as are they were 10 years ago.
The amount of money in the system just proved to you that more capital is starting to get involved and more investors are gaining traction returning to the markets.
All Eyes on iPhone Again
The highlight is basically to accumulate on weakness as the prospect ahead for the new iPhone is very positive.
Newsflows of iPhone procurement cuts started in January, and this has continued into March without any improvement in the situation, particularly for the more costly iPhone X. Similar to 2016 (poor iPhone 6S cycle), the iPhone supply chain is currently undergoing an inventory correction which should last till end-2Q18.
2018 iPhone – 3 new models, all with 3D sensing. We expect new iPhone launches in 2H18 to feature 3D sensors across all three models (6.5” OLED, 5.8” OLED, and 6.1” LCD), but with a smaller notch. Given the lack of major design changes and feature upgrades, we think that the shipment volume growth for next iPhone cycle will likely be incremental (0-5%). Thus, we have a relatively neutral view on the Apple component suppliers, unless there are new content gains to offset the flattish shipment volume.
(extracted from report)
How Should Malaysia Technology Sector be Valued?
Malaysian semiconductor stocks have corrected by 19-39% in 1Q18, underperforming the benchmark Philadelphia Semiconductor Index (SOX) and TWSE Semiconductor Index (TWSESCI) which gained by about 6% and 9% respectively.
(see report from more details)
What We Think?
The iPhone is still the major product for the Malaysian technology sector. The equipment makers would likely go to oversold territory in the next few months before it recovers further.
We felt that if you haven’t initiate any trades in this sector, it is best to sideline yourself. If you’ve had then timing and patience is key. We still do not see any tapering in the recent sell-off. Look for a price floor before accumulating.
With the recent rise in fuel prices albeit the whole world talking about major drop in crude. The chatter came onto social media saying that the government is rigging our petrol prices which makes it rise more than what it should.
Our analysis from historical data might disappoint you that it isn’t rigged. The chart below shows the plot from our expectation vs government determined pump prices.
As you can see from the plot, the variation was huge when the pump prices were determined monthly but the chart narrow its differences when the weekly mechanism came into place. The chart below shows RON95 determined by the government versus Brent instead.
Looks like the culprit is still our currency where Singapore Dollars are just getting stronger day by day. Our fuel prices are still determined using Mean of Platts denominated in SGD rather than USD. Just a quick disclaimer, our expected RON95 computed might have some discrepancies as we take our prices from Brent rather than Mean of Platts.
So remember this from now on, the pump prices are heavily pulled by the currency value and it gets worse if the economy of Singapore goes back to normal from their current slow growth.
Expected RON95 is calculated by using:-
RON95 price (last month) + (Brent price changes) + (Exchange rate changes)
= Expected Price for following month
The argument for the downgrade refers to the implementation of Malaysian Financial Reporting Standards (MFRS) 9. Somewhat similar to CET1 ratio, the provision methodology would change under MFRS 9.
It was estimated that under MFRS 9, it would negatively impact the net profit of banks in the future.
See the full report below including sensitivity analysis of respective banks.