PETALING JAYA: The ringgit is expected to strengthen against the US dollar in the longer term (two to three years) due to improved balance and terms of trade and China’s reopening, said Standard Chartered managed investments and product management head Danny Chang.
“The balance of trade, or the terms of trades, for Malaysia’s import-export have been improving significantly in the last decade. The terms of trade improvement definitely supports the longer term ringgit view,” he told reporters during its Global Market Outlook H2’22 press conference today.
Chang said now that China’s economy is reopening and bouncing back, it should underpin the strength of the ringgit for the medium and longer term. He mentioned a market consensus by Bloomberg which expects the ringgit to be at RM4.36 against the US dollar by the end of this year.
On the reason behind the ringgit’s weakening in the last three to six months, he opined that it was due to the interest rate differential between the US and Malaysia.
“Historically, the differential between, let’s say a 10-year US government bonds and a Malaysia 10-year government bonds, has been well over 2%, in excess of 200 basis points. (But) that is almost halved to about 100 basis points today,” he said.
He concluded that the narrowing of the differential reflects expectations of inflation and continued tightening by the US Federal Reserve.
Meanwhile, Chang estimates that Malaysia will experience 6-7% corporate earnings growth in 2023, driven by strong banking and financial sectors, as well as palm oil prices, which are also a key driver.
“Given that banking and financial sectors are key components of the local stock exchange, close to 40% of the earnings come from them, so these two core sectors alone should drive a fair bit of the earnings coming through,” he said.
He opined that sectors that are “lagging” and could be cause for “disappointments” are real estate and construction, which could “pull back” some profitability from corporate earnings.
In terms of equity recommendation, Standard Chartered Bank senior investment strategist Audrey Goh opined that Malaysia should be slightly “lukewarm” due to high inflationary pressures, and noted that the central bank is not cutting rates or (having) more fiscal spending to help support growth. Based on its analysis, it prefers India and China.
According to its latest report for H2’22, central banks are walking a fine line between controlling inflation and avoiding an economic recession. Standard Chartered expects inflation to ease only gradually, causing the Fed to maintain its aggressive stance and investors will have to gauge the extent to which risks are priced.
It forecasts that there is a 40-50% probability of a US recession and 40% probability of a euro area recession in the next 12 months.
China, meanwhile, is nearing the end of its downturn. In fact, the bank sees increased chances of a recovery as China’s fiscal and credit policies turn more supportive and business regulations ease. The gradual relaxation of lockdowns in major Chinese cities as Covid-19 infections wane should help the recovery. The Russia-Ukraine conflict remains the biggest source of uncertainty for the global economic outlook because of its impact on global energy, food and other commodity prices. according to Standard Chartered.