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KUALA LUMPUR: Corporate earnings for the recent second quarter have overall been within expectations, but they may progressively slow in the second half of the year (2H22).

Thus far, according to analysts, it has been a mixed bag in the second quarter, with some companies within the same sector reporting varied performances namely property, food and beverage (F&B), manufacturing and plantation.

Rakuten Trade head of research Kenny Yee told StarBiz that banks, plantation firms and real estate investment trusts have been the “obvious” winners in the second quarter, while the underperformers have mainly been in the manufacturing sector that has been unable to cope with rising costs.

He cautioned that rising material costs would be the key challenge for companies in 2H22. “It has been a mixed bag but overall, earnings thus far are within expectations,” said Yee.

On a positive note, UOB Kay Hian Research head of research Vincent Khoo said stocks under its coverage posted a “slightly” positive trend quarter-on-quarter, with a lower percentage reporting disappointing earnings and a higher percentage surpassing expectations.

“Positive earnings surprises were mostly linked to the consumers sector that saw robust demand amid higher average selling prices (ASPs).

“We are also expecting the banking sector to outperform due to lower-than-expected provisions leading to reduced net credit cost.

“Sector-wise, disappointments were mostly related to the glove sector due to soft ASPs and property sector that saw labour shortage issues and material supply chain disruption,” he added.

However, Khoo foresees corporate earnings momentum to slow in 2H22 due to domestic consumption slowdown from the tapering of the Employees Provident Fund’s special withdrawal scheme as well as a cut in consumption by businesses and consumers in view of the high inflation and bearish global economy.

“Sector-wise, we may see corporate earnings slowdown in the domestic-oriented and cyclical businesses, for example, properties and autos,” he said.

Another key drag to the earnings in 2H22 would be the cumulative cost inflation eating into the profit margins of businesses, added Khoo.

In addition to slowing corporate earnings growth, which also reflects slowing external demand, he said other corporate headwinds anticipated in 2H22 include a rising overnight policy rate and a globally tightening financial liquidity.

But he pointed out there are economic bright spots for manufacturers that would benefit from the successful recruitment and replenishment of foreign workers, which raises capacity utilisation, productivity and profit margins.

Meanwhile, he expects the ringgit to moderately depreciate against the greenback in 2H22 and through 2023, mainly reflecting the aggressive rate hikes by the United States throughout 2023.

As such, Khoo said a softer ringgit would be negative for import-dependent sectors such as F&B and for companies with high US dollar-denominated debt, adding that it would be positive to export-oriented sectors such as commodities and technology.

Sharing similar views, Johns Hopkins University professor of international economics Michael Plummer predicts the ringgit would continue to weaken but only marginally to about 4.60 against the US dollar over the next few months.

This is mainly due to the economic uncertainty in the global economy, with economic downturns in key economies like the United States, China and European Union countries.

“Moreover, the US Federal Reserve (Fed) has most likely not stopped increasing interest rates with inflation still at high rates – though future ones may well be smaller than the past two increases of 75 basis points.

“The European Central Bank will no doubt continue to tighten as well. These will lead to small but notable increase in the value of the US dollar vis-a-vis currencies in the emerging markets and elsewhere,” he said.

He expects the ringgit to depreciate to RM4.67 against the greenback by year-end, weakening to a further 5%, given the effects of decreases in global demand on Malaysian exports.

He said there are forecasts for a downturn in the US market, in part the result of the significant monetary contraction initiated by the Fed to reduce inflation.

The EU is also slowing down and China has big challenges, including its zero-Covid policy, which has led to major lockdowns, he added.

“With a slowing or contracting global economy, there will be less demand for exports, including of Malaysia’s. Hence its exports will slow.

“This will lead to a reduction in the supply of foreign exchange (US dollar) to Malaysia and thus, a slight depreciation in the currency.

“The depreciation, in turn, will help offset the decline in exports over time,” he noted.

Meanwhile, Rakuten’s Yee projects that the local bourse could see a better performance in the next two quarters due to improved liquidity, with a possibility of interest rate hike relented.

“So far, the market has performed credibly amid the heightened volatility on Wall Street,” he said.