 "I expect investors' risk appetite to remain poor: Nizam Idris")
Given the United Kingdom’s referendum’s outcome, are markets now in a prolonged phase of uncertainty?
These are unprecedented tasks for European Union leaders. Once the clock starts ticking, a two-year period begins, during which both parties have to ultimately agree on the exit terms unanimously. The tone of these discussions could be uncompromising and even frosty at times, as the EU leaders’ priority will be to prevent further fragmentation, and if generous terms are offered to the UK, this might persuade others to exit, too.
What is certain is a prolonged period of global uncertainty, particularly severe for the UK and EU. We think this is only the beginning for markets, a seismic shift in the landscape, necessitating a change in our global macro view.
Should investors look at these events as an opportunity?
One should not take too much risk when it is only the start of what seems likely to be a sustained period of uncertainty. Investors need to wait until there is better clarity on: One, how this impacts global consumption and investment demand; two, whether there are other restive EU and eurozone members that could go the same route and demand their own referendum; and, three, what relationship the UK hopes to maintain with Europe after leaving the EU.
There is also the issue of the upcoming US elections. Like Brexit, the market is seemingly under-pricing the risk of Donald Trump winning that election. The implication of that on broader global trade deals can be massive. All these uncertainties will take months to resolve. Until then, I expect investors’ risk appetite to remain poor, with any rallies taken as an opportunity to sell rather than to buy on dips, for now.
Do you think the US Federal Reserve will stay put as regards rates?
We think the US Fed will not raise interest rates anytime soon and is likely to struggle to increase it at all this year, should market volatility begin to impact consumers’ and investors’ sentiment. The market will likely have to price in a bigger risk of a nationalist shift in favour of Trump in the US Presidential election, a victory for whom could put at risk many more global trade deals.
Will the investors now flock to safe haven assets like the USD and gold as volatility and uncertainty looms?
We maintain a positive view of the USD but this must now be calibrated against an environment of heightened risk aversion. This is likely to force the US Fed to hold rates at current levels for longer, possibly through to the end of the year. This notwithstanding, we think the USD can still appreciate against the embattled pound (GBP) and possibly also the euro, where pressure could begin to intensify.
But we think the dollar's strength will not be unbridled; gold and Japanese yen will likely outperform the greenback in the short-term unless the Bank of Japan (BoJ) employs far more adventurous policy actions. Even as the US Fed remains on hold, other central banks are likely to need to ease more.
We think the one major uncertainty for the US is if the market begins to price in a higher risk of Donald Trump winning the upcoming presidential election, in which case trade deals involving the US will likely be at risk. The impact of such an election outcome on the dollar though is not immediately clear. All considered, the USD is not the first currency to come to mind when one picks a currency to sell for now, in our view.
How will global central banks respond to Brexit?Global uncertainties and potentially impaired appetite for consumption and investment into emerging market economies are likely to lead to more central banks in these countries easing monetary policies in the months ahead.
We expect Bank Negara Malaysia (BNM), the central bank of Malaysia, the Reserve Bank of India (RBI) and possibly the Bank of Thailand (BoT) to ease monetary policy further. We also think the People's Bank of China (PBoC) will ease monetary policy through reserve requirement ratio (RRR) cuts, driven both by domestic factors, given weak growth, and tightening capital market conditions.
The pound suffered its worst fall in about 25 years. Where does the carnage end?
There has not been any confirmation of intervention from global central banks so far, but they could step in if the pound to dollar exchange rate drops below 1.30 and threatens to provoke widespread financial instability. It seems unlikely for the GBP to recover immediately from here. We think it could settle around 1.30 over the coming days, before a longer-term downtrend gets underway when data reveal ongoing deterioration.
What is the road ahead for Asian currencies?
We think the market's reaction on the day Brexit referendum results were announced was very much in-line with our expectation, with the MYR and KRW the most heavily impacted, followed by the highly liquid SGD. Exposure to global trade, exposure to UK as a trading partner and beta to broad market sentiment will all likely impact these currencies more than the others.
While no Asian economy has the UK as its top five trading partner, Malaysia is probably the most exposed in terms of its export exposure. India's exposure is more from the imports side, rather than exports. We would stay out of the other Asian currencies for now.
