CIMB Group's Chu says the near-term outlook for the ringgit and Malaysian assets such as bonds and equities is bullish.
KUALA LUMPUR: The local stock exchange and the ringgit rallied on bullish market sentiment yesterday, following the resolution of the recent political impasse with Datuk Seri Anwar Ibrahim being appointed as the country’s 10th Prime Minister.
The FBM KLCI posted its strongest gain in over two years, with the ringgit appreciating against the US dollar as the political deadlock finally ended.
The benchmark index surged 58.38 points, or 4.04%, to close at 1,501.88 points, its highest since late August 2022.
The move is the biggest since rising 6.85% on March 20, 2020.
The index also hit an intraday high of 1,502.11.
Rakuten Trade head of equity sales Vincent Lau said: “This is definitely good news as it gives clarity and certainty to local and foreign investors.
“The FBM KLCI is currently up more than 40 points (after the noon break), and we expect the positive sentiment to continue.” In a report, Kenanga Research said it has raised its end-2022 FBM KLCI target back to 1,500 points from 1,450 points previously, based on 15.5 times its 2022 estimated earnings projection (9.3% lower), to reflect the resolution of the political deadlock.
“We believe the market will assess the effectiveness of the ‘unity’ government, which is unprecedented in Malaysia and in uncharted waters,” said the research unit.
Kenanga Research also opined that under a “power sharing” model, the most likely outcome is the continuation of the prevailing policy inclinations at least over the immediate term.
These include pro-business stance, protectionism for local industries, business-as-usual for government-linked companies and strong fiscal support to the economy including cash handouts and fuel and food subsidies.
These will help to cushion consumers from the rising cost of living amid sustained high inflation globally as well as pump-priming via the rollout of public infrastructure projects to shield the economy from external slowdown and headwinds, it added.
The research house believes that the “unity” government will be supportive of domestic consumption, and advise investors to seek refuge in domestically-driven sectors including banks, telcos, automakers and distributors, mid-market retailers and construction, amid rising external headwinds.
Also, the ringgit is expected to continue strengthening against the US dollar due to factors such as Malaysia’s economic fundamentals, an end to the recent domestic political impasse, market perception of slower interest rate hikes by the US Federal Reserve (Fed) and a stronger Chinese yuan.
According to CIMB Group
Holdings Bhd group wholesale banking co-CEO Chu Kok Wei, the near-term outlook for the ringgit and Malaysian assets such as bonds and equities is bullish, as investors are likely to reduce any tactical underweight positioning on such assets due to previous perceived political uncertainties.
Chu told StarBiz that his year-end tactical target for the ringgit is RM4.40 versus the greenback.
He pointed out that financial market participants and the investor community would look forward to the new Cabinet line-up as the next focus after the choice of Prime Minister.
“The line-up would likely provide some signals that may hint at any policy direction changes.
“Given the status of Budget 2023, a new or revised budget tabling is expected.
“This should provide more concrete direction regarding critical policies in areas such as education, trade and industry and the rationalisation of subsidies for a more sustainable long-term federal budget,” added Chu.
MIDF Research head Imran Yassin Md Yusof told StarBiz that with expectations of a US Fed pivot (slower pace of rate hikes) in December, the ringgit could continue to strengthen versus the greenback.
“In fact, the ringgit has been on a strengthening trend prior to the general election.
“We believe that indicates external factors are a more significant factor for the ringgit.
We had suggested in our report in August that the ringgit is undervalued due to the strength of our economic fundamentals,” he noted.
Imran, however, said that the aggressive rate hikes by the Fed had seen the greenback strengthening against other major currencies and “not just the ringgit”.
“Besides the Fed, Malaysia’s economic fundamentals and commodities’ prices could also be factors that influence the strength of the ringgit,” he said.
Meanwhile, United Overseas Bank Research senior foreign exchange strategist Peter Chia noted that the ringgit has pared some of its losses and recovered to about RM4.51 versus the US dollar as at 2.30pm yesterday, from the lows of RM4.75 in early November and RM4.57 earlier this week.
“One other key factor that could impact the ringgit is the trend of the yuan.
We note that the ringgit is highly correlated to movements of the yuan against the US dollar since April till about mid-November.
“This is not surprising given that China is one of the key trade partners of Malaysia,” Chia said.
He pointed out that a sooner-than-expected easing of China’s Covid-19 measures and new initiatives to support its troubled property sector after the 20th Chinese Party Congress had helped stabilised sentiments in the yuan since early November.
“That has also spilled over positively to the rest of Asian currencies including the ringgit,” he said.
Chia noted that going forward, as China transits into a more targeted and less prohibitive virus containment model, a firmer economic recovery in China next year would likely be a strong tailwind for Asian currencies, thus cushioning them from the expected recessions in the United States, the United Kingdom and European Union.
“Other potential catalysts for the ringgit include political resolution that paves the way for pro-growth policies and domestic reforms and further overnight policy rate hikes,” he said.
