This article first appeared in The Edge Malaysia Weekly on September 23, 2024 - September 29, 2024

THE spectacular performance of Malaysian equities thus far this year in response to major developments locally and abroad may well be a prelude to even better days to follow, should the projections of fund managers and heads of research hold true.

The FBM KLCI and FBM Top 100 Index have been on an upward trajectory, closing 14.72% and 16.65% higher year to date respectively at 1,668.82 and 12,231.21 points last Friday.

As investors reposition their portfolios for the fourth quarter ahead of the new year, the fund managers and heads of research whom The Edge spoke to are betting on the US Federal Reserve’s interest rate cutting cycle, its ensuing impact on the dollar and ringgit, and events on the domestic agenda as the foremost factors shaping their equity portfolio decisions going into 2025.

“Raise some cash and focus more on fundamentally solid companies, namely dividend-yielding companies with higher domestic exposure to benefit from domestic economic growth,” Tradeview Capital chief investment officer Nixon Wong Gok Hey tells The Edge.

“Numerous positive factors have come together simultaneously for Malaysia — foreign direct investment (FDI) inflows and encouraging headline figures such as the upward trend in exports, steady inflation and lower unemployment, to name a few. All of these position Malaysia as a prime investment destination in the region,” says a former fund manager.

“Judging by the regional investment flows, foreign institutional funds have made their way to the local bourse. Malaysia may not be the first choice, but is nevertheless among the top regional contenders for foreign fund inflows.”

Notably, the Fed’s recent 50-basis-point (bps) cut is seen as the end of an 18-month tightening cycle.

“This shift is a relief for emerging markets, particularly as many have struggled to respond to aggressive rate hikes, with some facing bankruptcy. As the cycle begins to reverse, the outlook appears brighter,” notes Areca Capital Sdn Bhd CEO Danny Wong.

Going into 2025, the majority of fund managers believe that the local market is in a position to benefit from the tailwinds of the Fed’s monetary easing cycle as historically the move has been a boost to the global markets as long as the overall macro picture remains favourable.

“Like what we saw in mid-2006 after the cessation of an aggressive rate hike cycle to the US monetary easing cycle, the US markets and FBM KLCI performed well during that period,” says MIDF Amanah Investment Bank Bhd head of research Imran Yassin Md Yusof.

“Market expectations suggest further cuts, potentially lowering the federal funds rate to 4%-4.25% by year end. This decision is seen as generally positive for Asian markets, with strengthening currencies in the Asean region expected to attract capital inflows. Historically, lower US interest rates benefit Asian equities by reducing the burden of US dollar-denominated debt and allowing for local monetary easing, which supports credit demand and economic growth,” says Danny, noting that growth stocks, especially tech stocks, which “now include data centre and artificial intelligence-related stocks”, are expected to outperform.

He explains that their appeal is heightened as a lower funding cost enhances their potential, while high-yielding dividend stocks — including real estate investment trusts — appeal to investors seeking income amid the diminishing yields of traditional asset classes.

However, some near-term “rough volatility” will be unavoidable as the markets adjust and reprice accordingly, the fund managers caution.

The good news continues to be that while the rate cutting cycle signals recessionary concerns in the US, which could present challenges for Asian economies, the long-term outlook for emerging markets remains encouraging.

Following the Fed’s rate cut of 50bps on Sept 18, the ringgit strengthened to 4.2 against the US dollar over the next two days, a level not seen since March 2022, making it the world’s top performing currency last week.

“The weakening US dollar compared with other currencies, including the ringgit, is a tailwind factor for our market. We expect this will engender foreign funds net inflow into emerging markets, including Malaysia,” says MIDF’s Imran.

He points out that numerous companies with import components in their cost structure or US dollar cost will benefit, such as those in the consumer staples and aviation sectors. He lists automotive, healthcare, downstream oil and gas, power and transport as sectors that will benefit.

Tradeview Capital’s Nixon says the National Energy Transition Roadmap-driven increases to meet its renewable energy target will be another factor to watch out for, as well as the rollout of the Fifth Large Scale Solar project and Malaysia’s Corporate Green Power Programme. These will support the utilities support sector, comprising players in water piping, power cable making and service provision, he adds.

“Naturally, technology and industrial production players will gain from the potential resumption of capex (capital expenditure) cycles by tech giants,” Nixon remarks.

Meanwhile, reiterating an earlier strategy note, UOB KayHian head of research for Malaysia Vincent Khoo tells The Edge that thematically, the research house is expecting event-related stocks to provide “alpha returns”.

“The key catalytic events include Iskandar 2.0, AI- and DC-related, blockchain, quality yielders, beneficiaries of a stronger ringgit, and cheap and laggard stocks. Stocks with near-term promising alpha returns are selected stocks in the glove, technology [particularly the blockchain, electronics manufacturing services and IT segments], property, construction, gaming and O&G sectors. However, we would still advise limited exposure trading in the less liquid or concept-oriented [pricey] stocks,” he adds.

In terms of Bank Negara Malaysia’s monetary policy direction, Kenanga Research said in a note two days after the US rate cut that it expected the central bank to keep the overnight policy rate at 3% for at least the next 12 months during the global rate-cutting cycle. It added that domestic factors, including robust trade growth and government initiatives that boost FDI, will continue to support the ringgit’s strong upward trend.

The research house has revised its end-2024 USD-MYR forecast back to its initial target of 4.25 on expectations that the ringgit could continue to trade stronger to the 4.15 to 4.20 range in the coming weeks, supported by Malaysia’s yield differential compared with developed economies.

“However, it may ease toward our target as the US Federal Reserve may not cut interest rates as much as the market currently expects. This week, the focus will shift to US manufacturing PMI (Purchasing Managers’ Index), durable goods orders and core PCE (personal consumption expenditures) data to assess the US economic health. We expect mixed results, which should [steady] the ringgit at around 4.20 against the US dollar. Fed chair Jerome Powell’s speech will also be closely watched for further policy clues,” says Kenanga Research.

Meanwhile, MIDF is confident that the ringgit will appreciate towards its year-end target of RM4.43, while maintaining its FBM KLCI 2024 baseline target of 1,750 points.

“The ringgit strength may taper off a little in the coming months before gaining strength again with more rate cuts by the US. It is still pretty much a data-driven play and this could influence flows into USD-denominated assets,” says Nixon, listing “victims to the ringgit’s strength” as exporters in the technology, glove and furniture-making industries, while beneficiaries include those in the consumer, telecom and media sectors (see analysts’ earnings forecasts for Bursa Malaysia’s top 100 companies by market capitalisation in accompanying story).

Most market experts share the view that for the better part of 2024, Malaysia’s stock market performance has been largely driven by local factors such as the Johor play benefiting construction-related and property companies amid data centre development plans as well as the steady growth trajectory of the electrical and electronics goods companies, namely those in Penang.

Fund managers say that in the near term, the details spelled out in Budget 2025 that will be tabled on Oct 18 will set the tone for domestic trends next year.

“Overall, we are positive on Malaysia and expect policies that are supportive of local consumption and business activities [SMEs], promoting fiscal discipline and FDI,” says Tradeview Capital’s Nixon.

MIDF Research’s Imran, however, believes that such domestic factors will not be the main drivers but more of a support line in driving the local market in 2025 as they have done this year.

In addition, foreign funds have played a major role in generating positive momentum, which has driven the local equity market thus far this year. From early January to Feb 27, the local stock market recorded net foreign purchases of RM2.4 billion while the FBM KLCI rose 104 points.

Subsequently, from April 22 to May 23, the local equity market recorded net foreign purchases of RM3.7 billion while the FBM KLCI rose 82 points. Notwithstanding the profit-taking in recent weeks, the local stock market recorded net foreign purchases of RM1.2 billion in July while the FBM KLCI rose 22 points.

As UOB KayHian’s Khoo would advise investors: “The easiest way to capitalise on foreign inflows is to bet on index heavyweights that are good proxies to the economy, such as banks and utilities, given that most of the foreign influence are index or passive funds.”

External factors, such as an escalation in the geopolitical conflicts in Ukraine and the Middle East, the outcome of the US presidential election which may lead to policy changes, and China’s economic slump, present a visceral challenge to the markets.

“But even with both the tailwinds and downside risks in mind, we opine that it is still an opportune time to invest in the market. But there is a need to tread cautiously and be selective. Locking in some gains is a prudent strategy but we believe it is unwise to stay on the sidelines as yet. In other words, stay invested but manage the downside risks,” says MIDF’s Imran.

“We advise investors to look at the volatility of the stocks. Low- to mid-volatility stocks would minimise the downside risks. We have seen how markets can be volatile, especially with the release of certain US economic data. However, this does not mean investors do not diversify as there are low or less volatile stocks in most sectors. Looking at dividend-yielding stocks is also a prudent approach,” he adds.

Meanwhile, Rakuten Trade Sdn Bhd has raised its year-end target for the FBM KLCI to 1,780 points from its previous projection of 1,730, driven by expectations of stronger corporate earnings and a more robust ringgit performance.

Addressing lingering concerns about another potential round of yen carry trade unwind by Japan, economists have pointed out that the Bank of Japan, which held its monetary policy steady at 0.25% last Friday, would continue its gradual normalisation path while still evaluating the impact from July’s first hike, which caused widespread market volatility in August.

As Areca Capital’s Danny puts it: “There is the risk of it, but I don’t see it as one that will be immediate. But once the rates go lower, that may trigger a price hike, which may pressure Japan’s easy monetary policy or keep the yen low.

“As such, as early as 2025, this risk may rise. When the carry trade becomes less feasible or the investment turns too risky, a reversal may happen in which investments in [high] growth economies are sold to repay borrowings.” 

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