PETALING JAYA: The broader equity market appears not to have fully reflected the recent positive momentum of the ringgit. This suggests there is room for further gains in the FBM KLCI.
According to CGS International (CGSI) Research, while the ringgit has risen about 13% against the US dollar since mid-July, the local benchmark stock index has gained by less than 2% over the same period.
As such, the brokerage maintained its end-2024 FBM KLCI projection at 1,760.
In its report yesterday, CGSI Research explained that the strengthening of the ringgit has a reflationary impact on domestic risk assets, including equities and real estate, as well as a positive impact on corporate earnings in general.
It added that its projection suggested room for further share price gains in 2025, underpinned by a shift to a weak dollar world, good domestic corporate earnings growth and further policy catalysts, including consumption boosts, fiscal consolidation and project rollouts.
The ringgit was traded around RM4.12-RM4.13 against the US dollar yesterday.
CGSI Research said following a 38% depreciation from below RM3 to the US dollar in May 2013 to RM4.80 in April 2024, the ringgit trend seemed to have decisively reversed.
While there was an initial move to RM4.32 as at Aug 30, 2024, ringgit gains have resumed with the exchange rate falling to RM4.15 against the greenback as of Tuesday, a 13% rise from the year’s low.
“The strong gains do not surprise us; this is something we have patiently waited for since September 2023,” CGSI Research said. “Yet, the FBM KLCI is up only 1.7% from the 1,636 high in July to 1,665 on Tuesday,” it noted, adding that currency benefit for laggards had clearly been overlooked.
CGSI Research said Sime Darby Bhd
, MR DIY Group (M) Bhd, Fraser & Neave Holdings Bhd, Hap Seng Plantations Holdings Bhd, SD Guthrie Bhd, Astro Malaysia Holdings Bhd and Malayan Cement Bhd are key beneficiaries of a rising exchange rate.
On the flipside, it said, “investors should be cautious of technology and gloves companies, where a 10% currency move could impact profits by over 30%”.
CGSI Research noted that the main sectors earning US dollar revenues are petrochemicals, technology and gloves, while sectors with imported costs include consumer staples and discretionary, importers such as media, building materials and auto companies, and upstream plantations.
“Big groups, such as Genting Bhd, Genting Malaysia Bhd, Sime, YTL Corp Bhd, YTL Power International Bhd, Muhibbah Engineering (M) Bhd, Axiata Group Bhd, CIMB Group Holdings Bhd, Hong Leong Bank Bhd and IHH Healthcare Bhd, would be impacted when profits of overseas operations are translated back to ringgit, but the loss will be mitigated by gains in those local currencies as well,” the brokerage pointed out.
“A key foreign currency debt winner is Axiata, with potential interest cost savings and an Edotco mergers and acquisitions as well,” it added.
Further, CGSI Research said financials and real estate or real estate investment trusts could be 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.
CGSI Research said the US dollar index could fall below 100 points and reach 90 points within 12 to 18 months given the weakening trend of the greenback.
This is especially so following the 50 basis points (bps) interest rate cut by the US Federal Reserve last week, and anticipated cuts of another 150 bps to 200 bps by the end of 2025.
“Considering the uncanny long-term relationship, our macro team’s recently revised end-2025 exchange rate target of RM4.20 per US dollar could even turn out to be too conservative, if this is, in fact, a major long-term trend reversal,” it said.
