Nov 11, 2016

Trump Win - Impact On Malaysian Companies


It’s a surprise outcome. The results from the many polls conducted prior to the election especially those after the presidential debates showed Clinton has a clear lead over Republican candidate, Trump. That led to the market to heavily price in the case of Clinton winning the election. At the end, both the polls and market proves to be wrong. With the win in Wisconsin, Trump gains 276 votes, 6 more than the minimum 270 electoral votes needed. Republican Party also increases their stranglehold in the congress by winning both chambers of Senate and House.

The American Exit. Basing on the manifestos, the Trump-led party focuses on inward-looking policies – centred on trade protectionism that revolves around raising tariff for imported items from China and Mexico, building a firewall between the US and the latter as well as anti-non-American policy, similar to the Brexit. The win imply that global protectionism will continue at a rapid pace, risking weighing heavily on the already stalling world trade growth into the negative.

Trade protectionism on the cards. Despite not being as dominant as it was before, exports to the US are still significant. As of September, exports to US amounts to RM59.4 billion or 10.4% of the total exports and have grown by 11.5% from a year earlier. This makes the US as the third biggest exports destination after Singapore and China. In fact, within the Top 10 exports destinations, the US is the only market that grows consistently by double-digit in the past three years. Currently, E&E constitutes close to 60% of the total exports to US. Hence, we expect with increase trade protectionism measures via tariff and non-tariff measures, exports growth to the US will be dampened in the mid to long-term. With the Republican’s policy to abolish support on renewable energy to pave way for cheaper sources like coal, this presents a significant headwind for the E&E exports ahead especially those related to renewable energy segment.

Uncertainty over future of TPPA. The probability of The Trans-Pacific Partnership Agreement (TPPA) may not materialize is high as Trump has repeatedly vowed not to proceed with the free trade agreement which involves 12 countries. To take effect, the deal has to be ratified by February 2018 by at least six countries that account for 85% of the group’s economic output. This means that the US and Japan will need to be on board thus without the US, TPPA will not proceed. Combining the whole effect, we foresee great challenge for trade to prosper moving ahead.
US-Malaysia relationship to remain strong. There will be no drastic changes in the short term. However, we can expect possible changes in US foreign policies should Trump push forward with his election’s manifestos, particularly in the following areas; 1) Fight against terrorism 2) stance on nuclear power 3) balancing China’s influence in the region 4) US approach on ongoing middle-eastern conflicts i.e. Syria and Iraq. From these 4 main areas, we can expect close relationship of US-Malaysia in addressing terrorism. In short, we believe Malaysia will look to maintain the good relationship it has with United States.

Impact on Ringgit and Fund Flows. As at 3.45 p.m. today, Dollar has lost ground against major currencies such as Euro (1.48%), sterling (0.68%), Yen (2.43%) but gain handsomely against the Mexican peso at about 10% as Trump’s rhetoric of building a firewall between the US and Mexico seem to inch closer to reality than a fussy statement. The EM markets (equity and currency) though including Malaysia dip slightly due to risk-off attitude among fund managers and flight to safe haven. Due to the funds outflow, Ringgit declines to 4.2277 or 0.6% – a trend seems reverberating across the EM currencies. However, we think that the result of Trump winning the presidency today also means that the Fed is more likely to pull off a December rate hike. Such event would be seen as definite positive for Ringgit as funds will be flowing back to EM markets. As mentioned above, Trump’s victory is a shock that could negatively impacted our domestic growth going forward. Thus, we are expecting BNM to continue its accommodative and supportive monetary policy in the near future. We are anticipating a possible rate cut should the after effect of the US Presidential is larger than expected. Our forecast for Ringgit remains unchanged for 2016 year-end target at 4.10. For 2017, as uncertainties remain high on Trump policies, Ringgit is expected to trade at 4.05 attributed to weakening in dollar.

EQUIRY MARKET
As the vote counts progresses in the US, the fear of Trump winning the presidency caused a knee jerk reaction on the futures market hard as the Dow Jones Industrial Index Futures nosedived by more than 700 points to 17,500 points with the VIX Index, which measures the implied market risk, rose almost 3 points to 21.38. Both recovered to 18,000 points and 20 points level as at 7pm.

trump and dow jones

DOW JONES INDUSTRIAL AVERAGE (DJIA) FUTURES YESTERDAY
On the Asian front, markets also reacted to this event and ended in the red across the board as investors weigh in the impact of Trump’s presidency amidst concern over the possible increase trade protectionism measures, which will negatively impact exports growth to the US. Even though most markets were able to pared down their losses and recover from the day lows, on average, key Asian market indices ended the day, on average with a 1.2% loss. After a knee jerk reaction at its opening, Europe markets recovered and recorded 1% gains. The DJIA and S&P500 also recorded gains as investors were positive over Trump win and a Republican-controlled congress.


IMPACT ON MALAYSIAN COMPANIES

THE POSITIVES

Short term positive for export oriented sectors
. As there will be temporary shock on the downside to the emerging market currencies, export oriented sectors, with a huge local content will likely see a rise in revenues during the uncertainties period, which will likely last for a year. The short term appreciation of USD against the MYR post President Trump’s win would be beneficial to the Glove Sector in terms of revenue as exports for gloves are USD denominated. We also do not foresee any impact on demand for rubber gloves as a result of the election as rubber gloves are deemed as an essential item. Having said that, we do note on the possibility that the appreciation of USD post-election will normalize in early 2017 and therefore we maintain our view and earnings forecasts on the rubber glove players under our coverage for now and continue to like Hartalega (TP: 4.48). Furthermore, should the TPPA agreement is not ratified by the US government, it will not open new markets for the glove players to trade. Operations wise, things will remain status-quo.

Geopolitics and its impact on oil supply
. On the continental United States front, Trump is in the favour of fracking, building of the Keystone XL pipeline, fossil fuel and arctic drilling. As such, this will bode well for global international oil and gas service providers such as SapuraKencana (TP: RM1.71). However, Trump is known to be in in favour of the previous administration’s Iran nuclear deal. If President Trump were to rescind the deal, we could see Iran’s oil production decline which will be positive for global crude oil price. Iran’s output has been on the rise, constituting approximately 10% of OPEC’s total production. In the short term however, President Trump’s win will be counterproductive to global crude oil price as investors will be sceptical on growth from the emerging markets which will in turn negatively affect demand for crude oil. In the medium to longer term, President Trump’s anti-Iran stance could bode well for global crude oil price as Iranian oil production could be curbed.

THE NEGATIVES
Long term pain for the manufacturing sector. Early this year, Trump mentioned that he wants American companies to bring back manufacturing jobs back to the US. This will disrupt Apple’s global value chain including Malaysia’s semiconductor players and related sub contract manufactures. As a result, we could see local semiconductor players could possibly lose some of their major clients hence face excess capacity in their plants. In addition, the expected weakening of the U.S. Dollar next year, will also eliminate any foreign exchange gain for the local semiconductor players as big chunk of the revenue from the export market is normally transacted in U.S. Dollar.
Logistics business facing pressure from inward looking policies. Trump’s campaign promises could possibly put a dent on FTAs, including NAFTA and TPP. He may even impose trade barriers against China over concerns on currency fixing, excessive government subsidies and use of US intellectual property. These will unsettle global trade, and thus could negatively impact the logistics and shipping businesses in the long term. The mitigating factor, however, is that these policies would take time to implement and might not even be cost effective to operate. And the affected companies could still strategize to shift their reliance from the US related businesses, focusing more on other regions, such as Asia-Europe and Intra-Asia trade lanes. However, having said that we believe Westports (TP : RM5.00) and MMC (TP : RM3.11) will be able to withstand the tailwind.

Consumer and Pharma products will become more expensive. Restrictions over the use of intellectual property would mean that products that are benefits from outcome of big research and development works done in the US, including consumer electronics, biotechnology, and pharmaceuticals could be adversely affected. With the inclusion of the higher cost of manufacturing in the US and threats of price controls no longer a concern, coupled with increase shipping cost to import these products, we could potentially higher selling price of consumer products, such as IPhone and higher cost of healthcare, particularly in the treatment of specific illnesses. This could possibly put pressure on the earnings of IHH (TP: RM6.95) and KPJ (TP: RM4.05)

Higher fossil fuel related power generating cost. Having a national policy that puts all energy sources on a level playing field could potentially see a recovery of coal prices. As fuel purchases make up almost half of Tenaga’s total cost with circa 39% of these comprising coal purchases, the Power sector will face cost pressure. While the USD is expected to weaken next year, we opine that this might not be enough to offset the rise of coal price.Meanwhile, technically, Tenaga (TP: RM16.80) might be negatively impacted by the strength of both USD and JPY currencies, but we take comfort in the fact that the majority of the borrowings are long–term in nature (96% of total debt are long-term), hence impact from the strength of the JPY and USD currently (which are expected to be temporary) will not be immediately realised. In the near-to-mid-term, currency fluctuations are only likely to result
in mark-to-market impact.

THE NEUTRALS
It’s all about demand and supply for Palm Oil.
Export of palm oil to US is only 4% of total export. In the first 9 months of 2016, export of palm oil from Malaysia to US is 477,040 MT and this is only 4% of Malaysia total export. As a result, we do not think that Trump win will have significant impact on CPO demand globally. With the expected depreciation of USD CPO price will remains stable. CPO price declined slightly by only 0.1% or RM17/MT as per time of writing. Therefore, we believe that the key factor determining CPO will be back to demand and
supply. And stock pick for this sector is KLK (TP: RM27.39), IOI (TP: RM5.05) and FGV (TP: 1.77)

No impact on domestic centric sector.
Sentiments for exporters with high percentage of sales to the US are likely to be impacted if Trump implements the protectionist policies. On the flipside, stocks that are reliant on the domestic market are likely to be shielded from volatility. For Banks, the possibility of OPR being maintained at current level due to the expected volatility in the financial markets will alleviate current NIM pressure that the sector is currently facing. Meanwhile for the property sector, its high beta nature of property stocks may cause near term share price volatility. As property stocks generally have higher beta, the short term decline in FBMKLCI is likely to cause more decline for most property stocks in the short term caused by risk off strategy adopted by foreign investors which will then cause them to sell emerging market stocks (including Malaysia property stocks). We opined the impact is temporary with the Fed unlikely to do a rate hike in December.

source: MIDF Research – 10/11/16


Further reading (click): 
Trump Triumphant What Does It Means For Malaysia

Trump’s Win – Bark Worse Than Bite?