Ringgit expected to strengthen against US dollar starting Q2 2023 – AmBank Research

Inve$t | Market Sentiments | 28 October 2022

Download Inve$t #130

Ringgit expected to strengthen against US dollar starting Q2 2023 – AmBank Research

According to AmBank Research, the ringgit should start to strengthen against the US dollar from the second quarter (Q2) of next year onwards and settle at the 4.40 level in the fourth quarter (Q4) of 2023, as the greenback is expected to enter a period of cyclical decline. The local currency has seen its weakest valuation against the US dollar on March 31, 1998, at 4.88. 

The research house recently reported that upside pressure on the currency remains which will be coming from both external headwinds and domestic noises. The ringgit is expected to weaken further in the first quarter of 2023 to 4.80 against the dollar. It forecast the interest rate differential between Malaysia and the United States would narrow in the second half (H2) of 2023. With a sharp slowdown or recession risk in the US, there are potential rate pullbacks by the Federal Reserve (Fed) in H2 2023. With an estimated reduction of 100 basis points (bps) in H2 2023, this would mean the interest rate differential would drop from a peak of 1.25-1.50 per cent to 0.25-0.50 per cent.  

The domestic economy would be much more settled post-15th General Election. This would mean the positive impacts of the 12th Malaysia Plan, foreign direct investment, domestic direct investment, domestic activities, exports and better management of inflation and Budget 2023 should provide the necessary comfort for the economy to expand around 4.5 per cent in 2023. 

Recapping the ringgit’s performance this year, the Fed’s aggressive rate hikes in 2022 with the aim to cool inflation led to a strong upwards bias on the ringgit. The currency fell by 13.5 per cent as of Oct 25, 2022, despite Bank Negara Malaysia (BNM) raising its policy rates by a cumulative 75 bps to reach 2.50 per cent until October 2022. Expectations are for BNM to raise another 25 bps in November 2022 and another 25 bps in January 2023, adding that this will bring the policy rate back to the pre-COVID-19 level of 3.00 per cent. The ringgit has remained weak despite the efforts to stabilising the currency by utilising around US$9.5 billion of BNM’s reserves. 

The Gross Domestic Product (GDP) recorded a strong growth of 8.9 per cent year-on-year in Q2 2022, adding that third-quarter 2022 GDP is expected to perform better, projected to hover around nine per cent to 10 per cent with the support of strong exports and domestic activities. However, it added the GDP is projected to grow at a slower pace in Q4 2022 to about 5.0 per cent. Despite a strong full-year GDP forecast of around 7.5 per cent to 8.0 per cent, the ringgit is poised to stay weak due to the “dollar play”. External headwinds plus domestic noises remain major drawbacks to the ringgit. Also, the interest rate differentials remain wide, favouring the dollar. The research house projected the ringgit in Q4 2022 would be at 4.70 against the dollar. 

Robust outlook for tech sector, say analysts – Despite favourable sentiment, there’s word of caution 

According to Hong Leong Investment Bank (HLIB) Research in their report released on Wednesday (27Oct), the Malaysian technology sector is set to experience multi-year earnings growth, supported by exponential demand and government incentives. It is favouring front-end players, as many countries are rushing to develop their semiconductor capabilities. This is especially the case for leading edge front-end fabrication looking to become more self-sufficient on the back of national strategic and security interests. Their top picks are Frontken Corp Bhd and UWC Bhd, which have exposure to front-end opportunities.  

HLIB Research is reiterating a “buy” call on Frontken with a target price of RM3.20. Frontken has a multi-year growth forecast, on the back of a sustainable global semiconductor market outlook, robust fab investment, leading edge technology, and a strong balance sheet to support its Taiwan expansion. The research house is also reiterating a “buy” call on UWC, with an unchanged target price of RM4.38. The ongoing trade intensity may eventually benefit UWC, which provides a one-stop solution as more companies shift production out of China to avoid import tariffs. 

Due to the Covid-19 pandemic, there is an increasing demand for digitalisation. This, has driven sales on a global scale and has also resulted in a worldwide chip shortage that has impacted supply chains across various sectors. After an amazing 26% growth in 2021, Malaysia is expecting a gain of 8% to 10% in 2022, followed by a weaker 2023. This is mainly due to the weaknesses in the consumer-centric end market, namely PCs and smartphones. However, the automotive segment remains resilient with strong bill-to-book ratios. 

On a separate note, HLIB Research said a total of RM52bil in semiconductor investments have been announced in the past 12 months that will potentially create 11,000 new jobs. Malaysia remains a key player in the global supply chain, as 7% of total global semiconductor trade flows through the country. Malaysia commands a 13% share of the global chip testing and packaging market. The electrical and electronics industries remain the largest contributors to Malaysia’s exports. 

In view of the impending implementation of the Global Minimum Tax (15%), the Malaysia Semiconductor Industries Association is working with the government to improve non-monetary incentives, such as automation, talent, supply chain, and research and development connectivity, to attract foreign direct investments. 

However the research house cautioned that despite the robust outlook for Malaysia’s tech sector, the industry is not without its challenges. These include economic headwinds – inflation, global recession risk and Taiwan-United States-China tensions – as well as consumer product demand corrections. Add to that supply disruptions – fire incidents in Japan, weather disruptions in the US, power outages in Germany, power allocation in China, Ukraine conflict, major drought in Taiwan and China’s zero-Covid policy – and a shortage of workers and talents will also present challenges to the sector. 

Indicators show M’sia still on expansion phase – Rising demand, robust external trade to support growth – MIDF 

According to MIDF Research, the domestic economy is expected to retain its momentum in the near term, judging from the latest reading of one of its major indicators – Malaysia’s Leading Index (LI). The LI is a predictive tool used to anticipate economic upturns and downturns an average of four to six months ahead. Most economists have pegged the domestic economy to grow at 4% to 5% versus 6.5% to 7% this year. 

Based on official estimates, the economy is expected to grow by 4% to 5% in 2023 versus a growth rate of between 6.5% and 7% this year. The economy advanced 8.9% year-on-year (y-o-y) in the second quarter (2Q22), accelerating sharply from a 5% y-o-y growth in 1Q22 and beating the consensus forecast of a 6.7% rise. Malaysia’s LI rose by 4% y-o-y in August this year compared with 4.1% y-o-y in July, signalling growth outlook in the near term. The sustained rise in LI was contributed by higher real imports of semiconductors, increased number of housing units approved and growth in real money supply (M1). Relative to July, LI rose by 1.6% month-on-month (m-o-m), indicating more positive developments in August compared to the previous month. 

Malaysia’s economic growth for this year is expected to be better than last year, driven by increasing domestic demand and robust external trade. Given the sustained macroeconomic growth and rising underlying price pressures, it is maintaining its projection that Bank Negara will continue to adjust the overnight policy rate higher to a more normal level at the monetary policy meeting next week. Nevertheless, several risks could affect Malaysia’s growth outlook such as a potential global slowdown, prolonged supply-side challenges, high inflation and rising borrowing costs. Meanwhile, the Coincident Index (CI) also saw sustained increase albeit at a relatively slower pace of 9.8% y-o-y in August compared with July’s 12.5% y-o-y. 

While the moderate growth was due to the higher base in August, continued growth in CI reflects mainly higher industrial production activities and better real salaries and wages in the manufacturing sector. Activities in August expanded due to growing business activities and better income growth for the employees. On a m-o-m basis, the CI rebounded by 0.8% after falling by 1.6% m-o-m in July. The CI is used to identify the current state of the economy. In general, increasing CI index shows that the economy is in an expansion phase, and a decreasing index reflects the economy is in a contraction phase. 

Eye On The Markets 

This week, on Friday (28Oct), the Ringgit opened at 4.7355 against the USD from 4.7115 on Tuesday (25Oct). Meanwhile, the Ringgit was 3.3226 to the Sing Dollar on Friday (28Oct). On Tuesday (25Oct), the FBM KLCI opened at 1383.50. As at Friday (28Oct) 10:00am, the FBM KLCI is up 55.61 points for the week at 1439.11. Over in US, the overnight Dow Jones Industrial Average closed down 90.22 points (-0.30%) to 30,333.59 whilst the NASDAQ shed 65.66 points (-0.61%) to 10,614.84. 

Leave a Reply

Your email address will not be published. Required fields are marked *