TA Research head Kaladher Govindan
PETALING JAYA: From trade dynamics to currency fluctuations, Malaysia’s export-driven economy could see both risks and opportunities as Donald Trump returns as the 47th president of the United States.
While Trump’s “America First” stance is set to strengthen the world’s biggest economy, his policies on trade and tariffs could create waves in global markets, with implications likely to resonate in Malaysia’s economy and financial landscape.
For instance, there could be increased global trade uncertainties and shifts, which affect investment flows, while the financial markets may see a stronger US dollar, which implies weaker currencies elsewhere, including the ringgit.
In terms of trade, there are concerns that Trump’s proposal to impose tariffs of up to 60% on imports from China into the United States, among other measures, could further intensify the trade war between the world’s two largest economies.
According to TA Research head Kaladher Govindan, key sectors that could be affected by the potential trade war include semiconductors, electric vehicles, solar panels and advanced manufacturing.
“However, the implementation of higher tariffs may not be immediate, as Trump’s intention is to strike a better deal with countries that the United States has high trade deficits. Thus, the implementation timeline may roll into the second half of 2025,” Kaladher wrote in a report yesterday. “In the interim period, trade may thrive as buyers stock up for rainy days,” he added.
CGS International (CGSI) Research managing director, head and strategist Chehan Perera stated that the most notable impact of Trump’s trade policy on Malaysian exporters could be on manufactured goods, particularly in sectors like technology and gloves.
“Having said that, we believe the impact on the latter could be manageable (even if a 20% tariff was introduced), given that tariffs on Chinese glove imports are expected to increase to 50% in January 2025 and 100% in January 2026.
“A loss in market share for Malaysian glove manufacturers would essentially come if US manufacturers are able to be competitive enough with a 20% tariff protection,” he said in his report.
“On the tech side, the impact could be greater as the level of automation and innovation in the United States could enable the benefit from the 20% tariff to matter,” he added.
Perera said he does not expect any material tariffs on commodity exports, although Trump’s policy on enabling greater US fossil fuel production could put downward pressure on crude oil prices.
“Higher tariffs on Chinese imports could accelerate China+1 investments into Malaysia; we also do not expect Western multinational corporations to scale back their multi-year investment plans in Malaysia,” he said.
Kenanga Research noted that with Malaysia’s heavy reliance on electrical and electronics exports, trade uncertainties could increase due to disrupted supply chains and limited export diversification.
“Over time, however, we expect trade tensions between the United States and China to shift investment flows, sustaining export gains for Malaysia similar to those from the 2018 US-China trade dispute,” the brokerage said.
“To safeguard growth, Malaysia may need to expand regional trade partnerships, build resilience against geopolitical shifts and capitalise on intra-Asian trade alliances,” it noted.
Meanwhile, Hong Leong Investment Bank (HLIB) head of research, Jeremy Goh, and his team opined that Malaysia would likely benefit from the trade diversion and proliferation of China+1 strategy as a result of Trump’s policy.
It noted that when Trump implemented huge tariffs on China goods during his first term, US imports from Malaysia grew at a compounded annual growth rate of 3.7% from 2017 to 2023, while US purchases from China declined at an annual pace of 2.6%.
“From a trade diversion angle (alongside near-term ringgit weakness), we believe that selected export-driven sectors in Malaysia would benefit, such as furniture, with the United States clamping down on ‘masked’ Chinese furniture; gloves, given recent acceleration of tariff hike (on China gloves); and technology, given higher tariffs on China’s semiconductors and steel and aluminium products,” Goh said.
HLIB Research noted that approved foreign investments into Malaysia saw a significant boost after the US-China trade war began, rising from RM54bil in 2017 to RM188bil in 2023.
“We reckon that proliferation of the China+1 strategy would benefit Malaysia’s electronics manufacturing services sector as brand owners diversify their manufacturing from China, while increased foreign direct investment to Malaysia would benefit sectors such as construction, industrial property and real estate investment trusts,” Goh said.
In terms of currency, a second Trump term will likely strengthen the US dollar, as the US Federal Reserve (Fed) is expected to now tread cautiously, slowing the pace of interest rate cuts. This is negative for the ringgit.
Earlier, the Fed was widely expected to cut interest rates by an additional 50 basis points (bps) in the fourth quarter of this year, following the first post-Covid rate cut of 50 bps in September, with another 100 bps reduction anticipated next year.
HLIB Research pointed out that rising expectations of a softer Fed rate downcycle – and consequently, slower narrowing of the US federal funds rate (FFR) and Malaysia’s overnight policy rate spread – would be negative for the ringgit.
Accordingly, the brokerage revised its end-2024 and average US dollar-to-ringgit target to 4.50 and 4.58, from 4.05 and 4.50, respectively.
“Nevertheless, we still expect the ringgit to have an appreciation bias next year,” it said, pegging its end-2025 and average US dollar-to-ringgit target at 4.00 and 4.34, respectively.
Kenanga Research said the Fed could limit rate cuts due to the fiscal expansion Trump would likely pursue.
“With national debt anticipated to rise by over US$7.75 trillion by 2035, pressure for a higher US term premium would likely push the US dollar index (DXY) up,” the brokerage said.
This could see the ringgit depreciate to around 4.57 to the US dollar by end-2024, with a potential recovery to 4.45 against the greenback in 2025 if market tensions ease.
“US dollar strength would also reflect heightened investor demand for US assets amid global uncertainty, potentially weighing on emerging market currencies as capital flows to the safe-haven greenback,” Kenanga Research explained.
Nevertheless, a weaker ringgit is not necessarily a bad thing, as it will benefit several sectors in the country such as automotive, banking, construction, gaming, healthcare, oil and gas, plantation and technology, as TA Research noted.
The brokerage estimated that every 5% weakening of the ringgit would increase net earnings by 1.4% for its stock universe and FBM KLCI component stocks under its coverage by 1.9%.
Perera noted that as Trump’s policies are inflationary and could provide some relief to the trade deficit, there may be a spike in US yields, which would support the case for a stronger US dollar. “However, with the FFR at 5%, we do not think Trump would support interest rates at such a relatively high level because of the implications on housing, household affordability, commercial real estate and small businesses. Hence, we maintain that the FFR should trend a lot lower (towards 3%) over the next 12 to 15 months, bringing down the whole yield curve, albeit potentially with some steepening at the long end,” he explained.
“Despite the initial knee-jerk reaction, we think the DXY should ease over the medium term (if US manufacturing is to be competitive), providing room for further ringgit appreciation,” he added.
Overall, Perera viewed Trump’s win as largely “neutral” to domestic growth, the ringgit and the equity market.
Kenanga Research, on the other hand, said it is monitoring for near-term ripple effects on the Malaysian market, including a potentially lower FBM KLCI upside from an expected 1,760 target for year-end induced by fund flow effect.
HLIB Research maintained its end-2024 FBM KLCI target at 1,700 points for now based on 15.5 times 2024 price-earnings. Its investment themes on tourism recovery, energy transition, Johor’s developmental reinvigoration and disposable income boosting measures should be fairly insulated against the US election outcome – while trade war beneficiaries could see revived interest, it said.
TA Research also kept its end-2024 FBM KLCI target unchanged - at 1,690 points based on 14 times forward earnings. It remained optimistic about Malaysia’s prospects due to the government’s subsidy rationalisation, multi-billion-ringgit public spending on infrastructure, foreign direct investment and domestic direct investment in renewable energy and growth sectors.
