KUALA LUMPUR (Jan 22): US dollar strength will continue to haunt the local equity market in the near term, according to HSBC, ushering the need for a “prudent and very selective” investment strategy, despite expectations of interest rate cuts by the US Federal Reserve (Fed). 

Despite HSBC forecasting three cuts of 25 basis points (bps) each in the federal funds rate (FFR) from June, it remains reserved about Malaysia’s equity market, according to HSBC Global Private Banking and Wealth Southeast Asia and India chief investment officer James Cheo.

“The FFR is at 5.25%-5.5%, versus Malaysia’s [overnight policy] rate (OPR) of 3%. You will face certain dollar strength, like it or not, because of the interest rate differential — that is a headwind for Malaysian assets,” Cheo said during HSBC's 1H2024 Wealth and Investment Outlook media briefing on Monday.

“That’s why, at least for Malaysian equities, I’m a bit selective. Because of this headwind, that capital will naturally gravitate towards the US,” he added. Domestically, Cheo said HSBC expects the OPR to remain unchanged at 3% in 2024. 

In contrast to HSBC’s forecast, Cheo noted that the wider market is expecting the Fed to cut the FFR “five to six” times at 25 bps each, starting as early as March.

Based on HSBC’s forecast, the FFR-OPR differential would fall to 1.5%, while under consensus market expectations, it would fall to 0.75%-1% — from 2.25% currently.

This “over-exuberant” market reaction in overestimating the Fed’s dovish pivot signals resulted in the greenback's depreciation seen late last year, according to Cheo. 

“What we think is that, let’s say when March happens, the market thinks the Fed will cut in March and it doesn’t cut in March, then the market thinks maybe their assumption is wrong and start to pare back gains. 

“So, I think at least for the next few months, you might get a bit of dollar strength and a little bit of ringgit weakness,” said Cheo. 

Nonetheless, he expects the local note to appreciate to 4.55 against the US dollar by year end, premised on stronger gross domestic product (GDP) growth of 4.5% expected for the Malaysian economy. The US dollar-ringgit exchange rate currently stood at 4.7255. 

Meanwhile, Cheo noted that there remain opportunities in the Malaysian equity market, citing the consumer products and services sector as a segment of the market HSBC likes, in addition to banks geared towards consumption-based plays.

HSBC Global Research foresees the bellwether FBM KLCI ending 2024 at a modest 1,510 points — a mere 1.21% uptick from the index's 1,491.91 at the noon break on Monday.

Touching on the global electronics upcycle, which is expected to drive Malaysian exports in 2024, Cheo said that while it will be a positive, he does not expect it to reach the heights seen in the last upcycle during the Covid-19 pandemic. 

“I don’t think it will be as strong as during the [Covid-19] pandemic, because during the pandemic, everyone bought that extra TV, monitor, or laptop. [On when it will pick up], basically, when you start to renew some of your appliances and devices, it's probably a reflection of that cycle," he said.

Besides higher electronics exports, robust domestic consumption and stronger tourism are expected to fuel Malaysia's 4.5% GDP growth.