“The balance and terms of trade for Malaysia’s imports and exports have improved significantly in the last decade, which definitely supports our longer-term ringgit view,” the bank’s head of managed investment and investment advisory, Danny Chang, told the media during its 2H 2022 Global Market Outlook virtual briefing.
He observed that the ringgit’s weakening over the last three to six months was due to the interest rate differential between the US and Malaysia.
Historically, the differential between the two countries’ 10-year sovereign bonds has been well over 2% or 200 basis points (bps) but this has almost halved to just over 100 bps today, he said.
Chang explained that the narrowing rate differential reflects an expectation of inflation and continued tightening by the US Federal Reserve of its interest rate.
The Fed has hinted at an expected year-end rate of 3.4%, while Standard Chartered has pencilled in a rate of 3.25%.
“This suggests that dollar strength may hold slightly longer in the short term, but the long-term view favours the ringgit,” he said.
Chang said that the ringgit’s eventual strength over the medium and long term is also underpinned by China’s reopening.
The latest market consensus by Bloomberg anticipates that the ringgit will end the fourth quarter of this year at RM4.36 against the greenback.
On the equities front, the consensus is that the country’s overall corporate earnings will grow by between 6% and 7% in 2023, supported by the palm oil and banking sectors.
Palm oil prices are expected to be a key driver while the financial sector is a mainstay on Bursa, accounting for almost 40% of earnings.
“Collectively the two sectors should drive a fair bit of earnings,” said Chang.
On the flip side, he expects corporate earnings in 2023 to disappoint in sectors which are currently lagging, such as real estate and construction, which could pull back on profitability.
On the broader equities market, Standard Chartered’s asset allocation and thematic strategy head, Audrey Goh, highlighted investors’ preference for Asian equities which is expected to outperform the US, Europe and other developed regions.
Zooming in, she said investors were more lukewarm towards Malaysia, preferring China and India instead.
“Inflationary pressures in Malaysia are quite high and I do not see the central bank actually cutting rates or getting more fiscal spending,” Goh explained.
China, on the other hand, is expected to institute measures to support growth.
Although more stringent, Goh said China’s Covid-19 lockdown strategy should not be viewed as something permanent.
“Eventually they will have to remove some of the restrictions thereby allowing economic activities to recover,” she said.
She recommended that investors trim their global equity allocation while adding exposure to bond markets.
“In our view, the recent rise in US and European government bond yields has priced in the majority of the Fed’s and European Central Bank’s rate hikes which now offer attractive yields relative to their own history,” said Goh.
“While the anticipated growth slowdown could negatively impact the credit quality of DM high yield bonds, yield premiums have priced in an elevated default rate at present,” she added.
Goh said Asian USD bonds continue to be preferred due to their high aggregate credit quality and signs of policy support from China.