Sunday, June 9th, 2019

 

Fixed deposit – still an attractive investment?

PETALING JAYA: Fixed deposit (FD) is low risk and great to invest in, but is it a less attractive investment avenue now due to the lower interest rate environment?

Following the cut in Bank Negara Malaysia’s Overnight Policy Rate (OPR) to 3% last month, banks have lowered their base rates and base lending rates, translating into lower cost of borrowing, but also a decrease in fixed deposit and saving account interest rates.

HLIB Research analyst Chan Jit Hoong opined that FD is not necessarily less attractive now given the lack of good alternatives in the market.

“For example, equities are going through a rough patch now, so generating capital returns would be rather difficult. For those who want assurance in returns, they would still stick with FD. That said, for the take-up rate of FD, we are already observing some tapering effect from the recent Bank Negara Malaysia (BNM) statistics – probably due to high base effect,” he told SunBiz.

For example, RHB Bank Bhd has revised its base rate and base lending rate downwards by 20 basis points (bps) effective May 13, 2019, to 3.80% per annum from 4.00% previously, and to 6.75% per annum from 6.95%, respectively. RHB Bank’s fixed deposit rates were also revised downwards by 20 bps.

Generally, Chan said, the difference for FD board rates before and after the OPR cut is equal or less than the 25bps OPR cut, and most banks have reduced their FD rates.

FD rates in the market vary from bank to bank, with their tenure typically ranging from one month to 60 months, such as from 2.80% (three months tenure) to 3.90% (60 months tenure).

“Board FD rates a bit on the low side. Aim for those promotional FD rates,” Chan recommended, adding that Islamic and conventional FD rates are largely comparable.

On “negotiable” rates, he explained that this is usually done over the counter and takes into account other considerations, include the size of the FD.

“This is highly dependable on bank’s strategy on whether to lock up their FD exposure based on different interest rate expectations.”

Chan said FD is important to banks as it makes up more than 50% of total deposits base. In the race for deposits, he expects more competitive pricing as product differentiation is limited. Although this will hurt banks’ margins, he sees competition easing in recent months.

FD typically provides investors with a higher rate of interest than a regular savings account until the given maturity date. But unlike savings accounts, the money cannot be withdrawn from the FD account before maturity. Some FD accounts, however, allow partial withdrawals subject to terms and conditions.

Besides conventional and Islamic FDs, banks also offer other FD accounts such as those for senior citizens, e-FDs, foreign currency FDs, accounts with quarterly interest crediting, flexible FD accounts and more. FD accounts typically enjoy higher interest rates in a rising interest rate environment.

AllianceDBS Research said the OPR cut will pile more pressure on the banking sector’s net interest margins, which have so far been depressed from keen competition for deposits.

It said banks with larger proportions of variable rate loans in their overall books vis-à-vis their fixed deposits base will be most affected by the OPR reduction. In this sense, Alliance Bank Bhd and BIMB Holdings Bhd would face the greatest short-term squeeze – variable rate loans account for 90% and 91% of their respective gross loans.

“Variable rate loans would likely be repriced within a short period; fixed deposit rates would take longer as the revised rates are only reflected upon maturity,” AllianceDBS said.

This means that existing FD accounts before the OPR cut would still enjoy the previous interest rates until their maturity; while new FD accounts would be subjected to the new rates.

BIMB expects the effect from the OPR cut to be temporary, but foresees a neutral impact in its full-year earnings for 2019, helped by the boost in its fee-based income from wealth management and bancatakaful.


G20 agrees to wrap up Big Tech tax rules by 2020

TOKYO: Group of 20 (G20) finance ministers agreed today to compile common rules to close loopholes used by global tech giants such as Facebook to reduce their corporate taxes, a final communique issued by the bloc showed.

Facebook, Google, Amazon and other large technology companies face criticism for reducing their tax bills by booking profits in low-tax countries regardless of the location of the end customer. Such practices are seen by many as unfair.

The new rules would mean higher tax burdens for large multinational companies but would also make it harder for countries such as Ireland to attract foreign direct investment with the promise of ultra-low corporate tax rates.

“At the moment we have two pillars and I feel we need both pillars at the same time for this to work,” Japanese Finance Minister Taro Aso, who chaired the G20 meetings, told reporters.

“The proposals are still a little vague, but they are gradually taking shape.”

Britain and France have been among the most vocal proponents of proposals to make it more difficult to shift profits to low-tax jurisdictions, with a minimum corporate tax also in the mix.

This has put the two countries at loggerheads with the United States, which has expressed concern that US internet companies are being unfairly targeted in a broad push to update the global corporate tax code.

Big internet companies say they follow tax rules, but they pay little tax in Europe, typically by channelling sales via countries such as Ireland and Luxembourg, which have light-touch tax regimes.

“We welcome the recent progress on addressing the tax challenges arising from digitisation and endorse the ambitious programme that consists of a two-pillar approach,” today’s G20 communique said.

“We will redouble our efforts for a consensus-based solution with a final report by 2020.”

The G20’s “two pillars” could deliver a double whammy to some companies.

The first pillar is a plan to divide up the rights to tax a company where its goods or services are sold, even if it does not have a physical presence in that country.

If companies are still able to find a way to book profits in low-tax havens, countries could then apply a global minimum tax rate to be agreed under the second pillar.

“I see a high degree of willingness to work together on this issue that few could have anticipated a year ago,” said Pierre Moscovici, the European Union Commissioner for Economic Affairs.

“We truly believe that the tech giants, which are not only the GAFA, must pay their fair share of tax where they create value and profits.”

GAFA is an acronym commonly used to refer to Google, Amazon, Facebook and Apple when talking about the influence of large technology companies.


Divided G20 says worsening trade wars pose risk to world economy

FUKUOKA, June 9 — The world’s top financial policymakers admitted today that trade tensions had worsened, posing a risk for the global economy, after a G20 meeting that laid bare differences between the United States and other nations. Following…


World’s top economies lay out principles on debt sustainability at G20 meet

FUKUOKA, June 9 — Finance leaders from the world’s top economies today adopted new principles to ensure countries that lend and borrow for infrastructure spending do so in a sustainable manner, a move seen as addressing concerns that China’s…


AmInvestment: CPO prices in doldrums

PETALING JAYA: AmInvestment Bank, which is underweight on the plantation sector, believes that crude palm oil (CPO) prices would continue to be in the doldrums as industry palm production is expected to increase in the second half of 2019 (H2 19).

“We would turn positive on the plantation sector if there are disruptions to supply, which would result in lower palm stockpiles. We are now assuming an average CPO price of RM2,100 a tonne for Malaysia in 2019 versus our previous assumption of RM2,300 a tonne,“ the research house said.

Overall, upstream profits of the plantation companies under its coverage fell 20% to 60% year-on-year in Q1 19. Also, the decline in the core net profit of the integrated companies in Q1 19 was not as sharp as the pure players as downstream earnings helped mitigate the slide in CPO prices.

“The year-on-year fall in CPO prices in Q1 19 could not be compensated by the increase in fresh fruit bunch (FFB) production. Average CPO prices realised by the planters ranged from RM1,900 a tonne to RM2,000 a tonne in Q1 19. The CPO prices realised were 17% to 23% lower year-on-year in Q1 19.”

It said FFB production in Malaysia rose in Q1 19 in contrast to the weak growth in Indonesia. The companies in its stock universe recorded FFB output growth of 3.1% to 14.2% year-on-year in Q1 19.

“In Malaysia, we believe that the year-on-year increase in FFB or CPO production would continue in the coming months. FFB yields are expected to improve in Malaysia in H2 19 after being affected by the lagged impact of El Nino in 2018. In H2 18, industry CPO production in Malaysia slid 5.4% year-on-year.”

However, UOB Kay Hian maintained its market weight on the sector, maintaining its view that CPO prices in 2019 will be stronger on the back of lower production, strong demand for biodiesel, lower soybean crushing, and lower rapeseed and canola production. Its CPO price assumption for 2019 is RM2,350 a tonne.

The research house expects downstream to continue to perform well in Q2 19.

“Most of the companies achieved high downstream margins. With low feedstock prices, we reckon downstream operations of the companies would continue to benefit and perform well in Q2 19, in line with management guidance.”

It added that with the current implementation of B10 biodiesel blending for the transportation sector and stronger demand, biodiesel plants’ utilisation rate has also increased. Utilisation rates are expected to be higher with the implementation of B7 biodiesel blending for the industrial sector starting July.

“2019 should see higher biodiesel usage, supported by the expanded biodiesel mandates in Indonesia and Malaysia.”


IMF’s Lagarde urges G20 to prioritise resolving trade tensions

FUKUOKA, June 9 — International Monetary Fund Managing Director Christine Lagarde today called on the Group of 20 major economies to prioritise resolving trade tensions to mitigate risks to global growth. “We met at a time when the global…


KESM upgraded to ‘market perform’, outlook promising

PETALING JAYA: Kenanga Research has upgraded KESM Industries Bhd to a “market perform” with a lower target price of RM7 from RM7.20 previously, despite the lack of near-term catalysts.

“While the weakness in the automotive market continues to dampen KESM’s near-term prospects, the group’s long-term outlook remains promising. Additionally, we believe most negatives have been priced-in at the current price levels,” it said in a report last Friday.

Kenanga Research said the long-term growth prospects of the group remain positive due to rising semiconductor content in vehicles and KESM’s sturdy balance sheet with net cash standing at RM118 million as at end of 3Q19, which positions the group well to weather the momentary market softness.

It also noted that the group is currently working on new product classifications for end-products such as car cameras and sensors for park-assist.

KESM registered a core net loss of RM500,000 in Q3 19, resulting in a 91% year-on-year drop in core net profit of RM2.6 million for the nine-month period. The group did not declare any dividend for the quarter.

Kenanga Research attributed the earnings miss to the Chinese imposition of tariffs on US vehicles and the introduction of the Worldwide Harmonised Light Vehicle Test Procedure emission regulation, both of which affected vehicle sales in the regions during the quarter.

For the second half of the calendar year 2019, KESM prefers to remain cautious and avoid overspending as it expects automotive demand to remain sluggish and the next semiconductor upturn to only happen at end-2019 earliest.

“We concur with management’s view, as we see no major catalyst in the automotive sub-segment for the near term,” said Kenanga Research.

It trimmed its FY19-20 core net profit estimates by 11-3% to RM11.5 million to RM20.1 million, after lowering its earnings before interest and tax margin assumptions from 4.5-6% to 4-5.9%.


In historic first, G20 weighs ageing as global risk

FUKUOKA, June 9 — Ballooning healthcare costs, labour shortages and financial services for the elderly: for the first time today, the world’s top policymakers are tackling economic issues relating to ageing and shrinking birthrates. G20 finance…


Report: China warns tech giants after US Huawei ban

WASHINGTON, June 9 — The Chinese government convened top tech companies this week and warned them of consequences if they cut off technology sales to the country, US media reported yesterday. The meeting followed US President Donald Trump’s move…


G20 finance leaders’ communique to describe trade tensions as ‘intensified’, say sources

FUKUOKA, June 9 — Group of 20 finance leaders agreed to describe trade and geopolitical tensions as “intensified” and pledged to take further action to address these economic risks, three G20 sources said as a second day of meetings got…