The derivatives, or futures and options, industry has grown tremendously, from the conventional floor open outcry to the electronic trading platform of today, said Lam Choon Jin, Executive Director of Philip Futures Sdn Bhd, a leading futures broking company and one of the Trading Participants of Bursa Malaysia Derivatives Berhad (BMD).
By Ariel Chew
“This development has successfully brought the industry to a new phase as evidenced by the growing volume and participation from both the retail and institutional markets,” he added.
Closer to home, Bursa Market Derivatives Berhad (BMD) has achieved increasing volume over the years especially for its flagship product — the crude palm oil futures, FCPO, among others (Table 1).
TABLE 1: BURSA MALAYSIA DERIVATIVES EXCHANGE MARKET VOLUME
Lam commented that amidst all the uncertainties caused by Donald Trump’s looming inauguration, 2017 still offers opportunities as World Bank’s latest economic data indicated that China has shown improvement and strength, while Trump’s tax cuts could possibly jump-start the global economy.
He also predicted that the Malaysian derivatives industry is about to face more competition and challenges ahead. “We foresee technology intervention such as algorithmic trading or robotic trading to come into the market within months,” he said.
“With the adverse developments in the world’s economy along with our country’s impending General Election, the index futures in Malaysia (FKLI) is the benchmark to reveal the country’s outlook and to unlock infinite trading opportunities.”
Things Are Looking Bright for Gold
Gold, a safe haven asset, finished at a high level in late 2016 in reaction to the global economic turmoil and depreciation of the MYR, which have been making gold more resilient and affordable for investors holding foreign currencies.
Lam recommended BMD’s gold futures, FGLD, as the product for risk-adverse retailers seeking to have a hedge against global economic turmoil. “Should Malaysia adjusts its policy rate in 2017, say by cutting it, the Ringgit would be adversely affected and therefore, FGLD would be good to have a stake in,” said Lam.
Strength in Malaysian Palm Oil Futures
Retailers who wish to gain greater exposure in the commodities market can certainly take a look at the Crude Palm Oil Futures contract (FCPO). “It is highly liquid and its strong fundamentals with transparent information always reveal opportunities to reap some handsome profits in the market,” said Lam.
The rally in the Malaysian palm oil futures in late 2016 was mainly led by the MYR, he added. In fact, crude palm oil was a star performer in the commodities space for most of 2016. “We reckon this trend will continue this year provided the overall supply in palm oil remains subdued. Prices could sustain on a higher base this year as the fundamentals point toward resiliency.”
He also said that opportunities abound in this asset class as its demand continues to grow from major markets such as China and India.
“Despite the weakening MYR which may continue to boost palm oil prices in 2017, the recovering palm oil production which is expected to be underway in 2H17 may see prices off their recent highs.”
Measures to Combat the Weakening Ringgit
Lam opined that the recent BNM ruling that allows investors to freely and actively hedge their US dollar and yuan with an exposure of up to RM6 million per client per bank is a good move, due to the expectation of a strong US dollar as the US Federal Reserve gears up for further rate hikes this year.
This, he said, will provide greater flexibility to multi-national companies to deal strategically with the Yuan and Dollar exposure.
“Continuous liquidity in the foreign exchange market is definitely the prerequisite for developing a well-functioning capital market in order to facilitate greater hedging flexibility. Such ruling is expected to allow greater public access to hedge currency uncertainty,” he said.
“If such a move extends to other currency pairs which Malaysia could trade with favourably, we should see greater participation as Malaysia remains an open market to global trades.”
The Way Forward
The common fallacy among retailers is that they view futures and options as being risky instruments, Lam divulged. “This assumption holds no water with the growing usage of derivatives in markets across the globe, as hedging instruments in today’s market.
“It is the absolute financial instrument in times of uncertainty, either to mitigate risk or leverage risk to enhance overall returns,” he emphasised.
When it comes to futures and options, retailers should act according to their own risk profile and to always bear in mind the risk-reward ideology.
“Opportunities always come in times of uncertainty. But it is a fact that futures provides price discovery and is a better leading indicator in unveiling market sentiments.”
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