KUALA LUMPUR: A potential rate cut by the US Federal Reserve could be the catalyst for new opportunities on the domestic market as various sectors experience knock-on benefits from lower global lending rates, said Kenanga Research.
"Examining the impact to the FBM KLCI - after a US rate cut, it has most of the time proven benign or positive.
"Out of the past 10 rate cuts, only on three occasions did the local market stay in negative index return territory over a 12-month horizon, two of which were during the Global Financial Crisis, and Covid-19 pandemic," said the research firm in its market strategy report.
For the capex-heavy oil and gas sector, a decrease in lending costs could ease operating conditions and translate into improved sentiment.
Kenanga said sentiment in oil price could be further restored following its recovery to more than US$70 a barrel, which is a level that historically comensurates well with oil and gas spending by oil majors.
"We like players servicing the upstream space, such as Dayang Enterprise Holdings Bhd
, and we also like Wasco Bhd, which is more leveraged to the global exposure for its pipe coating business.
"Within big caps, we watch for Dialog Group Bhd as its storage business may act as a hedge should there is weakness in oil demand."
Meanwhile, Kenanga said the steady rate environment will also benefit Malaysian banks, which have enjoyed a good run since August.
"Unlike peers, Malaysia banks likely have enjoyed the relative stability of steady interest rates, in addition to decent yield and a potential pick-up on exchange rate, for foreign investors especially," it added.
It cited also an earlier report that said banks within the large cap space - including CIMB Group Holdings Bhd and Public Bank Bhd - with a beta of more than one, may attract larger interest amid fund inflows.
Kenanaga said it favoured Public Bank for its more disciplined growth, which is a preferred play for 2H24.
"Foreign funds are less likely to be induced into buying smaller caps banks although on that score, beta for AMMB is generally high, and the banks has enjoyed YTD pick-up in foreign shareholding."
As for REITs, the research firm said it had recently upgraded the sector to "overweight" amid improved foreign buying and the resuling decline in the 10-year Malaysian government securities (MGS) yield.
Since July, the MGS yield has declined from 3.88% to about 3.75%.
"We believe that partly following the US rate cuts, and disciplined supply of MGS, there is scope for MGS yields to end the year lower around 3.6%.
"The spreads between the returns for investing in REITs vs MGS yields, at about 2.75% will be at level that historically causes investor interest to once again be piqued and drive upside movement of REIT share prices," said Kenanga.
The research firm chose Pavilion REIT and Sunway REIT as its sector picks.
