As the new year begins, StarBizWeek writers attempt to size up issues that would affect the economy - from the price of oil to asset quality in Indonesia - and how they would pan out during the year
Forecasting what is to come in 2016 is a hazardous job. Everything points to the next six months being tough for the country on the back of a slump in oil prices, low commodity prices and the rising cost of living as the Government undertakes to reduce its subsidy programme.
But how low can oil prices go? Or will Bank Negara raise interest rates this year?
These are are some of the key indicators that would dictate the pace of the capital markets and the economy for this year.
In examining these matters, the key is to ask the right question for an answer that we hope would help readers size up the situation. Find below eight key predictions for 2016.
Q: Will the FBM KLCI drop below 1,500 points in 2016?
No. A key theme affecting markets for 2015 was the uncertainty due to the US Federal Reserve’s move to raise interest rates for the first time in nine years and its possible repercussions.
However, of late the volatility that occurred in mid-2015 has reduced, suggesting that markets will revert to a focus on fundamentals.
According to MARC chief economist Nor Zahidi Alias, the KLCI’s earnings multiple has averaged at around 16.5 times per annum since the 2008-2009 global financial crisis.
Corporate earnings are set to normalise in 2016 as the impact of GST is set to be fully absorbed.
In its forecast for 2016, MIDF Research notes that its target price of 1,800 points for the KLCI in end-2016 is based on a forecasted earnings multiple of 16.3 times, which is close to its historical average.This suggests that overall earnings per share (EPS) for companies that make up the KLCI would improve considerably next year for it to reach those levels.
According to Bloomberg data, the index would carry an earnings multiple of 13.65 times if it were to trade at 1,500 points. At such levels, it is likely that local and foreign investors would jump at the chance to acquire blue chip stocks, given that their corresponding dividend yields would be much higher compared to the low stock prices. — By Afiq Isa
Q: Will asset quality of Indonesian banks improve?
No. Non-performing loans (NPLs) in the banking sector in Indonesia are underpinned by the slowing economy, weak rupiah and softer commodity prices.
As a commodities-driven economy, this year has been a challenging one, with the Indonesian government revising downwards its growth target for 2015 to 5.2% from 5.8% previously. Economic growth in 2016 is expected to be equally challenging.
The recent currency volatility that has caused the rupiah to weaken significantly could affect corporate repayment capacity given that Indonesian corporates recorded the fastest growing foreign debt in Asean in recent years. Indonesian banks are likely to face higher impairments on their loans with NPLs expected to increase from the 2.5% level as end-April 2015.
Malaysian banking groups like Malayan Banking Bhd and CIMB Group Holdings Bhd, which have operations in Indonesia, via their units PT Bank Maybank Indonesia Tbk and PT Bank CIMB Niaga Tbk respectively, could see pressure on their asset quality.
However Maybank and CIMB have implemented measures to mitigate any unexpected headwinds that could see potential spike in NPLs. Besides growing its assets selectively and closely monitoring its asset quality, CIMB Group’s moves to set up a special-purpose vehicle (SPV) for the transfer of some bad loans from CIMB Niaga to the SPV could see the potential reductions of NPLs moving forward. — By Daljit Dhesi
Q: Will the price of CPO hit RM3,000 per tonne?
Yes. Prices should move north considering that a full-blown El Nino is expected to happen by the second quarter of 2016 and if Indonesia implements its B20 palm oil bio-diesel mandate.
Between 2009-2010, the El Nino weather phenomenon resulted in severe supply disruption, which saw CPO prices swinging between RM2,500 and RM3,000 per tonne range. Malaysia posted the largest drop in CPO production during the strong El Nino events back in 1982-1983 and 1997-1998.
In October, the ongoing dry weather patterns in oil palm growing areas are seeing below average rainfall, particularly in Sabah, south and central Kalimantan, south Sumatra, Sulawesi and Papua.
Another price catalyst is Indonesia’s bio-diesel mandate. The republic is expected to take up about 2.6 million tonnes of CPO as feed stock for its biodiesel production this year (2016) from 1.2 million tonnes in 2015.
The benchmark Malaysia CPO futures should get a boost if Indonesia soaks up more of its CPO for blending into B20 biodiesel, thus resulting in fewer CPO available for exports.
Both events should ease the current record-high palm oil stockpile of three million tonnes that has restricted the upward movement of CPO prices for most part of 2015.
The downside risk for CPO prices is a higher-than-expected soybean yield, resulting in lower soybean prices and consequently CPO price. — By Hanim Adnan
Q: Will crude oil prices average below US$30 per barrel in 2016?
No. Everything at the moment points to crude oil prices heading south with more supply coming in.
Apart from Saudi Arabia that has kept up production, the shale oil producers have also proved to be tenacious even with the low oil price environment.
Next year the world will see Iran joining the global markets to supply oil while in the US the commodity is allowed to be exported – after laws preventing it being lifted after 40 years.
But the low price environment has already weeded out the weak producers and some kind of equilibrium should be found in the second half of 2016. Oil producers cannot sustain operations at persistently low prices.
Interpacific Head of Research Pong Teng Siew believes that crude oil prices will not stay below the range of US$40 for the second half of 2016.
It would instead be traded within the range of US$45 per barrel then.
MIDF Research is of the same view, citing a better second half of the year on assumptions backed by the global asset breakeven prices and average fiscal breakeven prices for global oil-producing countries.
The research house is of the opinion that the low oil price climate will negatively affect the Organization of the Petroleum Exporting Countries (Opec) members, which could cause the cartel to an eventual scale down of production. – By Toh Kar Inn
Q: Will airlines pass savings from lower jet fuel cost to consumers?
No. Airlines’ total fuel bill has shrunk from about 30%-40% of total operating cost to 27% in 2015. It will shrink further to about 20.6% in total operating cost this year.
That means the fuel bill has fallen from US$226bil in 2014 to US$180bil last year and will only be US$135bil this year. Most airlines will also be free of their high hedging contracts this year.
Crude oil prices are down by 44% from year (Jan 1, 2015) to date.
The International Air Transport Association (IATA) expects profits in the aviation industry to touch US$36.3bil in 2015 from US$33bil last year.
The higher profits have paved the way for more competition resulting in some travellers getting slightly better value in some markets. Surprisingly there has also been slight rise in airfares in some markets.
Airlines are using the savings from fuel cost to launch share buyback programs, increase dividend payments and reduce debts. Others are investing in fleet and service upgrades.
The irony is that when oil prices heads north, airlines are quick to impose fuel surcharges, forcing travellers to help foot their fuel bill, but when the reverse happens, they are slow to take it off and in some cases are disguised as “all inclusive airfares.’’
With oil still expected to head south, possibly closer to US$32 a barrel, and with IATA predicting 3.8 billion passengers to travel this year, airlines will have another roaring year. — By B.K. Sidhu
Q: Will the condominium market be priced from RM650 per sq ft?
No. But it will be an extremely tough year for this segment of the condominium market.
The market is not expected to see the light even by the end of 2016 because of the sheer over supply. According to the National Property Information Centre (Napic), there is an existing stock of more than 520,000 units of high-rise residentials (condominiums and serviced apartments) in the three main regions of the Klang Valley, Penang and Johor at the end of the third quarter of 2015 with an incoming supply of about 227,400 units for the same period. There is a planned supply which has already been approved by the authorities in the respective areas totalling 127,100 for the same period.
There are a lot of condominiums and apartments in the secondary market selling below market price today and this situation is not limited to the Kuala Lumpur City Centre where the country’s most high-end units are located.
Because of the sheer volume, a lot of these units will remain vacant, or owners will have to rent them out below their monthly mortgage payments. Some may decide to cut sell below market value. Prices of high-rise residentials are expected to drop at a minimum of 10% next year but a collapse is unlikely. — By Thean Lee Cheng
Q: Will Bank Negara raise interest rates?
No. There are good reasons for the central bank to keep the country’s benchmark interest rate unchanged at 3.25% through 2016.
For one thing, Malaysia’s economy will likely face increasing headwinds, given the still-fragile external environment, weak oil prices and moderating domestic demand. So, an accommodative monetary policy, with the overnight policy rate (OPR) maintained at the present level, is still needed to support the country’s economic growth.
For another, there is no runaway inflation that necessitates a rate hike to stabilise prices. Yes, while inflation, as measured by the increase in consumer price index, in 2016 will likely be higher than what it was last year, the pressure is expected to remain benign and manageable. That’s thanks to what’s expected to be a sustained period of weak oil prices.
And although the US Federal Reserve’s policy shift in recent times has caused massive capital outflow from emerging markets, and many currencies, including the ringgit, to decline in value over the last one year, Bank Negara is unlikely going to counter the impact by raising the OPR due to reasons discussed above. What’s clear here is, the central bank is also unlikely going to cut interest rates, even as the country’s growth is expected to slow this year, as the move could risk exacerbating the weakness of the ringgit.
So, with no reason to raise and limited room to cut, OPR at 3.25% is here to stay. — By Cecilia Kok
Q: Will the ringgit weaken to 4.80 to the US dollar?
No. The ringgit has been pretty stable versus the US dollar ever since the Dec 17 announcement by the US Federal Reserve of a hike in the benchmark federal funds rate.
However, the market expects the ringgit to average 4.40 to the greenback with the consensus ranging between 3.90 and 5.00. A number of factors will affect the ringgit’s performance. Top on the list will be the direction of crude oil prices. Analysts have warned that further weakening of oil prices will impact the ringgit.
Secondly, the direction of the yuan.
Currency strategists say that countries in South-East Asia with close trade linkages with China will be see their currencies impacted by a weaker yuan. Thirdly, the Fed has signalled that there could be more rate hikes in the offing this year and it would dampen the ringgit sentiments.
Lastly, for those who are asking if the ringgit will ever go back to the 3.80 levels seen before August, the answer is also “no”. For that to happen, fundamentals will have to be very much stronger and investors will have to be more convinced that Malaysia’s growth story is sustainable and that reforms of the economy will continue to be pushed even though they are unpopular. — By Fintan Ng
http://www.thestar.com.my/business/business-news/2016/01/02/predictions-for-2016/?style=biz
