Kuala Lumpur, 28th – The Malaysian stock market has experienced a sluggish performance recently, primarily influenced by the state elections and the Federal Reserve’s interest rate policies. Analysts predict that the market will continue to struggle in the third quarter, but there is optimism that a turning point may occur in the last quarter as the interest rate gap between Malaysia and the United States reaches its peak. Investors are advised to seize the opportunity to absorb during this time.
According to analysts at Hong Leong IB Research, the market weakness is expected to persist into the third quarter. However, as the market speculates that the gap between the US Federal Funds Rate (FFR) and Malaysia’s overnight official rate will peak in September, the ringgit and the Malaysian capital market could experience a turning point in the fourth quarter.
In an analysis report released today, the bank suggests that the current market weakness presents a favorable opportunity for investors to capitalize on. Once the state elections and the cycle of interest rate hikes by the Federal Reserve conclude, the market is likely to undergo a recovery in the fourth quarter, reigniting risk appetite among investors.
However, the bank cautions that the possibility and extent of a US recession remain significant risks, although the potential for a “soft landing” should not be dismissed, considering the repeated delays of anticipated recessions.
Looking ahead, the market is expected to rebound post-election as political risk premiums subside, with the assumption that governance in six states remains unchanged.
The bank believes that once the dust settles on the state election results, a unity government will have a significant runway to implement necessary economic reforms, albeit potentially unpopular ones. Hong Leong IB Research suggests that National Energy (TENAGA, 5347, main board utility) could be a promising investment choice in the “post-election game,” as the government may consider adjusting electricity tariffs.
While Malaysia’s economic performance in the first quarter surpassed expectations, recording a growth rate of 5.6%, weak exports during that period indicate a further weakening of the country’s economy in the remaining months of 2023.
Hong Leong Investment Bank Research highlights that economic growth is expected to decelerate in the second half of the year due to the absence of a low base effect, slowing global growth, tightening financial conditions, and lingering geopolitical risks.
Therefore, the bank maintains its forecast of 4.5% year-on-year GDP growth for 2023 (compared to 8.7% in 2022). Private consumption will remain the primary driver of growth, and the bank expects the Ministry of Finance to achieve a target budget deficit of 5% for the fiscal year 2023.
Inflation is expected to continue slowing, but with the reopening of the economy and the ongoing recovery of domestic demand, headline inflation and core inflation are projected to exceed pre-pandemic levels in 2019.
Bank Negara is anticipated to maintain the overnight official rate at 3% by the end of the year as inflation moderates amid a slowdown in the second half of 2023.
The Malaysian ringgit is expected to depreciate until the third quarter due to the implementation of austerity measures in the United States and other developed economies. However, a slight appreciation is projected in the fourth quarter, reaching 4.40 by year-end.
Hong Leong Investment Bank Research highlights that risk aversion sentiment following the Federal Reserve’s interest rate hikes has led to a year-to-date average exchange rate of 4.46 against the US dollar for the ringgit.
Additionally, the yuan’s depreciation, influenced by weaker-than-expected economic activity in China, has also impacted the ringgit due to Malaysia’s close trade ties with China. However, the ringgit is anticipated to experience a slight appreciation in the fourth quarter due to moderate inflation, a cooling labor market, and improved domestic political stability after the state elections.
The bank projects an overall depreciation of the ringgit in the second half of 2023, with an average exchange rate of 4.67 (compared to 4.46 in the first half of the year). The average exchange rate for the entire year is forecasted to be 4.56 (previously 4.34 in 2022), with an expected rise to 4.40 by the end of the year.
Furthermore, the state election results maintaining the “status quo” are expected to be positive for gaming stocks such as Numbers and Genting Group. This outcome mitigates regulatory or policy risks.
Foreign investors’ reduced holdings in Malaysian stocks over the past three years, resulting in a record-low shareholding ratio of 20% (as of May), are expected to provide a reasonable channel for capital to flow into the local stock market. Measures to withdraw the provident fund and increase domestic investment, along with the reduction of stamp duty on stock transactions, aim to revive retail investor participation.
Based on a projected price-to-earnings ratio of 14.8 times in mid-2024, the FBM KLCI is estimated to reach 1,530 points in 2023, with a profit growth rate ranging between 6.3% and 6.7%.
In conclusion, while the Malaysian stock market faces a sluggish third quarter, analysts anticipate a turning point in the fourth quarter as the interest rate gap between Malaysia and the United States peaks. Investors are encouraged to seize opportunities during this period. However, caution is advised due to the possibility of a US recession. Economic growth is expected to weaken in the second half of the year, with private consumption remaining the key driver. The Malaysian ringgit is predicted to depreciate until the third quarter before experiencing a slight appreciation in the fourth quarter. Foreign shareholding ratios have hit a record low, but measures are being implemented to encourage local investment. Gaming stocks are expected to benefit from the state election results, and the FBM KLCI is projected to reach 1,530 points in 2023.
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