Rmb devalution

Maybank-KE highlights that the latest Rmb currency move is welcome given the economic strain China is under. However, the house suspects that the size of the move could mean that we could see greater currency volatility throughout the region.

For equity investors, the markets may suffer a significant correction in the next few months because:

Outside China:
1) USD strength continues to put pressure on markets with higher external liabilities and the recent Rmb weakness could be a signal for more pressure as some of China’s deflation gets exported elsewhere.
2) The relative performance of Emerging to Developed Markets has hit a critical level
3) Rising risk of a US market correction given technical, weak earnings growth and valuations

Within China:
1) We don’t think we have seen the bottom of the A-share market yet given uncertainty over how and when the government will exit its stock holdings
2) Continue to be concerned about the potential for further capital outflows
3) Uncertainty over economic growth. Property sales and prices could slow after the recent stock market correction.

Policy Options:
Maybank-KE expects the Chinese government to launch a much stronger fiscal stimulus. Exports remain weak and the idea to use the stock market to help corporates deleverage is now no longer valid. Instead, the government policy to provide more capital to support stocks could weaken its ability to direct more credit to private companies without significant monetary ease and therefore more currency weakening.

Overall, Maybank-KE advises investors to remain cautious and defensive. While the A-share market is oversold and valuations are not expensive, the house believes that valuations could undershoot in their environment.