PETALING JAYA: Company share prices have room for further gains in 2025, underpinned by a shift to a weaker dollar, good domestic corporate earnings growth and further policy catalysts, says CGS International (CGSI).
The research firm, in its strategy report, reiterated a year-end FBM KLCI target of 1,760, adding that the currency benefit for laggards has been overlooked.
Going into more detail, CGSI said it believes Sime Darby Bhd
, MR DIY Group (M) Bhd, Fraser & Neave Holdings Bhd (F&N), SD Guthri Bhd, Astro Malaysia Holdings Bhd and Malayan Cement Bhd are the key beneficiaries of a rising exchange rate.
However, it said investors should be cautious of technology and gloves companies, where a 10% currency move could impact profits by over 30%, according to its estimates ceteris paribus.
Meanwhile, big groups such as Genting Bhd, Genting Malaysia Bhd, Sime Darby, YTL, YTL Power International, Muhibbah Engineering, Axiata, CIMB, Hong Leong Bank, and IHH Healthcare would be impacted when profits of overseas operations are translated back to ringgit.
However, losses are expected to be mitigated by gains in those local currencies as well.
“A key foreign currency debt winner is Axiata, with potential interest cost savings and an Edotco M&A as well.
"In addition, we think financials and real estate or real estate investment trusts (REITs) are potential indirect beneficiaries due to the benefit from increased domestic liquidity and foreign exchange volatility for the former and reflationary impact on asset prices for the latter,” it added.
Going back to 2005, CGSI highlighted an uncanny correlation between the ringgit against US dollar (USD) cross rate and the Dollar index (DXY).
“Essentially, there was continued money flow into USD assets, supported by a strong equity market, and in the recent years, rising US policy rates, completely ignoring a rising fiscal deficit, almost tripling of US government debt and unabated current account deficits,” it said.
Together with Fed cuts signals in July and with expectations for another 150 to 200 basis points (bp) reduction by end of 2025, CGSI said it expects the DXY to break the psychological 100 handle soon and could reach 90 within 12 to 18 months.
“Considering the uncanny long-term relationship, our macro team’s recently revised end of 2025 exchange rate target of RM4.20 against USD could even turn out to be too conservative, if this is in fact a major long-term trend reversal,” it added.
CGSI said the ringgit trend seemed to have decisively reversed following the 38% depreciation from below RM3 against the USD in May 2013 to RM4.80 against the USD in April 2024.
And while there was an initial move to RM4.32 against the USD as at Aug 30, 2024, ringgit gains were observed to have resumed with the exchange rate falling to RM4.15 against USD as of today – reflecting a 13% hike from the year’s low.
“The strong gains do not surprise us – this is something we have patiently waited for since Sept 2023. The reflationary impact on domestic risk assets should be significant, including equities and real estate, in our view,” CGSI stated.
However, it noted that the KLCI is up only 1.7% from the 1,636 high in July to 1,665 on Sept 23, 2024.
“While the RM is up 13% since mid-July, we are disappointed by the less than 2% gain in KLCI over the same period.
“Moreover, it is not just the reflationary impact on risk assets that we think investors are overlooking but, more importantly, our contention that ringgit appreciation is overall positive for earnings,” it added.
