KUALA LUMPUR (Sept 19): The US Federal Reserve’s (Fed) recent interest rate cut is expected to ease capital inflows into Malaysia, boosting the ringgit and supporting local equities, according to economists and market analysts.
The shift towards a dovish outlook in the US monetary policy is likely to drive foreign investors towards emerging markets like Malaysia, where better returns are anticipated, said Rakuten Trade Sdn Bhd head of research Kenny Yee.
“Foreign investors typically target blue-chip companies, especially in the banking and telecommunications sectors,” Yee told The Edge. “They often focus on the top 10 companies within the FBM KLCI components.”
The FBM KLCI, which consists of 30 component stocks, has been on an upward trajectory this year, reaching a year-high of 1,684.68 on Aug 29, its highest level since December 2020. Year to date, the index has risen over 14%, outperforming regional peers including Vietnam (+12%), the Philippines (+8%), and Singapore (+8%).
Areca Capital, in a separate note, highlighted that growth stocks — particularly in the technology and artificial intelligence sectors — are expected to outperform in a lower interest rate environment.
“Lower funding costs make these sectors more appealing, while high-dividend stocks are likely to attract income-seeking investors amid declining traditional yields,” the firm said.
On Wednesday, the Fed cut its benchmark interest rate by 50 basis points (bps) to the 4.75%-5% range, marking the first rate cut in four years and the start to a further monetary policy loosening in the world’s largest economy.
Policymakers projected further cuts by year-end and in 2025 and 2026, which could bring the rate down to a range of 2.75% and 3%.
If the Fed continues to cut rates, the positive spillover to Malaysia’s equity market could be more significant, Yee said during Rakuten Trade’s 4Q2024 Market Outlook presentation earlier in the day. “Foreign funds are likely to seek out undervalued markets in the Asean region”.
MIDF Amanah Investment Bank’s head of research Imran Yusof also weighed in, saying that several sectors could benefit from the Fed’s rate cuts, primarily due to a weaker US dollar.
“Companies with significant import components in their cost structure, such as those in the consumer and aviation sectors, may see gains,” Imran told The Edge. However, he flagged that foreign fund flows would also depend on sector-specific factors and valuations.
Meanwhile, the ringgit, which has already appreciated from RM4.75 to the dollar in April to around RM4.20 currently, is expected to strengthen further towards the end of the year, the economist said.
“We expect that the US dollar will continue to weaken with the beginning of the US rate easing cycle, thus strengthening other currencies including the ringgit,” Imran added. A stronger ringgit may attract more foreign funds back into the local equity market.
"Depending on the spread between Malaysia’s 10-year MGS (Malaysia Government Securities) and US 10-year treasury yields, the ringgit may dip below the RM4.00-mark if the yield differential continues to widen," Yee said.
Historically, this spread has averaged between 80 to 100 bps.
Kenanga Investment was latest to revise its ringgit forecast against the greenback to RM4.25 (from RM4.42 previously), while noting that the Fed may not cut rates as aggressively as markets are anticipating.
The research house noted that factors such as robust US corporate earnings, low default rates and a resilient labour market could offer support to the US dollar, thereby moderating the ringgit's appreciation.
While the outlook for Malaysia appears promising, economists and market analysts have cautioned that external risks — particularly volatility on Wall Street and uncertainties around US economic policies — could still impact the local market.
High valuations in the US market and concerns over its growing national debt, now at US$35.4 trillion (RM149.8 trillion), may trigger sudden shifts in investor sentiment, Rakuten said.
Kenanga also cautioned that external risks, including uncertainties surrounding the US election, ongoing economic challenges in the US, China's economic slowdown and geopolitical tensions, could create headwinds.
Economists also expect Bank Negara Malaysia to maintain its overnight policy rate at 3% for the remainder of 2024, in anticipation of continued gross domestic product growth, driven by a recovery across various sectors.
To receive CEO Morning Brief please click here.