Bursa: Weaker ringgit to benefit exporters, inflation to affect share trades
1. How does the weaker ringgit against the US dollar affect
Malaysian share trade dynamics?
The weaker ringgit against the US dollar will benefit
exporters. Therefore, sectors that are export-oriented with high local content
are likely to benefit with better earnings and price performances.
Resource-based sectors such as plantation and energy would have similar impact
as the weaker ringgit and higher commodity prices are likely to propel earnings
higher for resource-based players. This can be seen from the Plantation index
(YTD May 2022: +22%) and the Energy index (YTD May 2022: +19%), which have
outperformed the other sectorial indexes. On the other hand, a much weaker
ringgit or volatile movement of the local currency may create challenges for
businesses, which could ultimately affect their bottom line. Foreign investors
may also choose to stay on the sideline if they perceive that the ringgit may
weaken further as this could hurt their capital.
2. What are the key factors (in Bursa's opinion) which will
affect Malaysian share trade dynamics in the second half of 2022?
Some of the key factors which will affect Malaysian share
trade dynamics in the 2H22 are:
•
Inflationary pressures
The ongoing Russia-Ukraine war and China's zero-Covid policy
have caused global supply disruptions, resulting in the rise in commodity
prices and inflation. Inflation erodes real disposable income, which may erode
consumer confidence. That said, some of the sectors may stand out to be more
resilient than others. For instance, consumer staples are likely to weather the
storm as demand for them is relatively inelastic in nature. On the bright side,
we are blessed with natural resources and commodities like petroleum products
and palm oil, which could help cushion the inflationary impact. Resource-based
players are likely to benefit from the commodity price rally.
•
Rising interest rates
Globally, central banks are in the mode of increasing
interest rates to combat high inflationary pressure. As Malaysia transitions
into the endemic phase, Bank Negara Malaysia (BNM) has also taken measures to
revise overnight policy rate (OPR) to the pre-pandemic level while considering
the economic state of the country. Rising interest rates will result in higher
borrowing costs for businesses, which may in turn dampen their expansion plans.
This would then lead to slower earnings growth in the near term. On top of
that, higher interest rates will also make it more expensive for consumers due
to higher loan repayment, which in turn reduces the disposable income for
consumers.
However, the central bank is still likely to set OPR at a
level that is conducive for economic growth as it considers the rate and pace
of the interest rate adjustment. One key beneficiary of interest rate hikes is
the financial sector, as higher interest rates could lead to higher net
interest margins.
•
The possibility of general election
A possible call for the 15th general election may create
uncertainties in outlook for companies that rely heavily on government
projects. The political uncertainties could also keep foreign investors at bay.
However, businesses that generate high level of their revenue by exporting as
well as sectors that are premised on consumption growth are likely to be more
sheltered from any political changes.
•
Reopening theme to cushion the impact
BNM has projected 2022 gross domestic product (GDP) growth
of 5.3%-6.3%, driven by the reopening theme and resumption of projects with
multiplier effects and strong external demand from our major trading partners.
Foreign direct investment (FDI) grew by RM23.3 billion to RM812.1 billion in
the first quarter of 2022 from the preceding quarter, with the manufacturing
sector receiving the highest value of FDI at RM347.1 billion. The tourism
sector, which has been in the backseat for the past two years, is likely to
recover with the reopening of international borders, thus benefitting the
hospitality, transportation, recreational, and services sectors.
•
Corporate earnings
Corporate Malaysia's earnings are likely to improve
year-on-year premised on the country's GDP growth and reopening. Malaysian
listed companies currently have a very attractive price-to-earnings ratio
(PER). To put things into context, our benchmark FBM KLCI was trading at a
trailing PER of 15.1x as at end-May, the second lowest among our regional peers
that ranged between 12.9x and 17.3x. Through this, the Malaysian equity market
looks very appealing fundamentally.
Sources: https://www.theedgemarkets.com/article/bursa-weaker-ringgit-benefit-exporters-inflation-affect-share-trades
