Malaysia Market Strategy. YTLP, YTL and EWI are most exposed to the UK
● UK’s hung parliament increases political, Brexit and Sterling risks.
● Over three working days, the Sterling has weakened 2.6% against the MYR to RM5.3887. YTD, the Sterling has weakened 2.2%.
● According to CS Global Strategist Andrew Garthwaite in his report entitled “UK election: thoughts on a hung parliament”, Sterling is the critical driver (pharma, consumer staples performing the best when sterling weakens; retailing, banks and real estate the worst).
● There are just a handful of Malaysian companies with exposure to the UK, mostly via the property and utilities sector. YTL Power, YTL Corp and EcoWorld International profitability appear to be the most exposed to the UK.
Figure 1: Close correlation between UK property and Sterling
The UK conundrum
Following UK’s hung parliament, CS Global Strategist Andrew Garthwaite in his report titled “UK election: thoughts on a hung parliament” highlighted the following conundrum.
Politics: CS believes another election within a year is a strong possibility. The challenge is that those aged over 65 predominantly vote Conservative and many of Conservative’s policies (on social care, pensions and the winter fuel allowance) penalised them. The dilemma is that 66% of under 25s voted for Labour and 75% of under 25s votRemain in the EU referendum.ed
Brexit: Two-thirds of UKIP votes went to the Conservatives and there are around 40 committed Brexiteers in the Conservative ranks whose support the Prime Minister will rely on. This appears to limit the prospects for a softer Brexit.
Sterling: The risk of a negotiating accident (i.e. a hard Brexit without a transitional deal) has risen, but still seems to be, on balance, unlikely. Sterling is 12% cheap on PPP against the dollar, and the current account deficit has more than halved. CS believes Sterling is unlikely to weaken further from current levels.
Macro: CS economists continue to forecast 1.4% GDP growth (consensus 1.7%) versus 1.8% in 2016. Employment lead indicators are weakening and the savings ratio is at a 40-year low.
Small caps are set to underperform large caps as PMIs roll over. An increased prospect of a Labour government is negative for small caps (rise in tax rates, more regulation, higher wages, higher rates).
Sectors: Sterling is the critical driver (pharma, consumer staples performing the best when sterling weakens; retailing, banks and real estate the worst). CS stays underweight UK regulated utilities, London- and South East-exposed homebuilders (expensive, housing cycle rolling over and threat of increased tax), UK office REITs. CS remains overweight UK non-food retailing.
Figure 2: Malaysian corporates with exposure to the UK
Malaysia’s corporate exposure to the UK
Over three working days, the Sterling has weakened 2.6% against the MYR to RM5.3887. YTD, the Sterling has weakened 2.2%. In Figure 1, we highlight Malaysian companies that have exposure to the UK, following the uncertainties and volatility over the hung parliament in the UK. There are just a handful of Malaysian companies with exposure to the UK, mostly via the property sector. YTL Power, YTL Corp and EcoWorld International profitability appear to be the most exposed to the UK. Over the past three days, YTL Power, YTL Corp and EWI’s share prices have remained resilient in light of the new risk, only falling by 1.3%, 0.0% and 2.9%, respectively.
source: Credit Suisse 14/06/2017
