PETALING JAYA: The recent inflation acceleration in the United States may delay the recovery of the ringgit this year but will not completely derail it.
Hong Leong Investment Bank Bhd (HLIB) said it anticipates an uplift in the second half of the year due to the resurfacing of “further” and “fewer” sentiments on the Federal Funds Rate (FFR).
“Given peak FFR, we expect US dollar strength to eventually subside, likely around mid-year when it becomes more apparent that a pivot is forthcoming – bearing in mind the presidential elections in November,” it said in a research note.
This, in turn, will augur well for the ringgit, given the 93% correlation between the US Dollar Index and dollar to ringgit.
It also said following the gross domestic product performance in 2023, it is projected to normalise upwards to 4.8% this year, driven by a rebound in exports and growth in domestic expenditure.
“Export growth, which has been contracting since March 2023, is now turning positive and is projected to be supported by stronger global trade activity in the tech cycle,” it said.
HLIB added that for the time being, it expects the ringgit to remain weak in the near term before resuming its appreciation path to end the year at RM4.45 to the dollar.
It also noted that the peaking of the FFR and overnight policy rate (OPR) spread has in the past been a decent gauge of the ringgit’s standing from an interest rate differential standpoint.
The investment bank said it maintains its view that the OPR will remain at 3% this year.
Another positive factor to support the economic recovery is the usually laggard benchmark stock index registered a good start this year, increasing as much as 7.2% to 1,559 by late February before easing slightly in March to end the first quarter with a 5.6% rise.
“On a currency adjusted basis, FBM KLCI’s first-quarter gain was watered down to 2.7%. However, this still outperformed the Asean five’s 1.3% decline,” it said.
HLIB has forecast FBM KLCI’s earnings to grow at 7.1% and 4.1% in 2024 and 2025, respectively.
“Our FBM KLCI target remains unchanged at 1,630, based on 2024’s earnings per share tagged to 15.1 times price-to-earnings ratio. We foresee the market trending sideways till mid-year before resuming its uptrend in the second half of 2024 towards our target,” it said.
The bank said other than the anticipated US Federal Reserve cuts, the 50% inverse correlation between the FBM KLCI and FFR-OPR spread makes it relatively less attractive to invest in the US risk-free rate, thus encouraging fund flows to emerging markets such as Malaysia and vice versa.
Meanwhile, HLIB said domestic headwinds have been more favourable as economic growth is projected to move ahead on a positive note and subsidy reforms are in the pipeline to strengthen the fiscal position.
It also took note that the current political climate is more stable and approved investments for 2023 boasted a record RM329.5bil, a 23% year-on-year increase.
It said it will remain positive on tourism recovery as a tourist arrival target of 27.3 million has been set, which could translate into RM96.6bil in tourist receipts.
“The continued recovery in tourist arrivals to Malaysia will be driven by visa-free travel for China and India nationals and reinstatement of global flight capacity. We remain positive on tourism beneficiaries – aviation, brewers, Genting Group and healthcare,” it said.
