Maybank Investment Bank Bhd (Maybank IB) is projecting the ringgit to end 2023 stronger at RM4.05 against the US dollar from the current 4.4-level as sentiment leans towards the upside with the greenback taking a breather from its 2022 rally.
Head of foreign exchange (FX) research and strategy, global market, Saktiandi Supaat said the local currency would strengthen in a sustained manner as concerns over the United States (US) Federal Reserve rate hikes and political uncertainty that dampened sentiment on the ringgit in the last few months have now dissipated.
He said the fall in commodity prices from 2022 peaks might weigh on the ringgit but the impact would be moderated as the trade balance holds up on China’s reopening and the ringgit looks cheap in real effective exchange rate (REER) terms.
“The outlook for the ringgit should hence lean (towards the) positive although we stay wary of risks such as a higher-than-expected US federal funds rate or a global economic recession,” he said during the Maybank IB 2023 Market Outlook media briefing.
He said the local currency is forecast to end the first quarter of 2023 at 4.4 per cent against the US dollar, and further recover to 4.25 in the second quarter and 4.15 in the third quarter.
Saktiandi also said the reopening of China’s international borders will benefit Asean FX especially in the areas of trade and tourism.
He said trends in trade balances and exports to China suggest that the ringgit, Vietnamese dong and Indonesian rupiah could show a resilient performance, while the return of Chinese tourists would be a significant positive for the Thai baht in 2023.
“Regional currencies remain sensitive to yuan swings, and positive movements of the Chinese yuan could result in pretty significant spillover effects for Asean FX,” he said.
Saktiandi said the strength of the US dollar, which followed a series of interest rate hikes in 2022, would eventually diminish with the currency likely to witness choppy trading in the first half of this year.
However, the second half of 2023 should see a confluence of factors weighing on the greenback, including Europe’s recovery from recession, China fully exiting the Covid-19 pandemic, a peak in US interest rates and moderation in inflation, and a further monetary tightening by the Bank of Japan, he said.
“Therefore, the US dollar is not expected to be as strong as in 2022. However, risks to our views remain such as a sharp US recession weakening risk sentiment or easing in Russia-Ukraine tensions, both of which can push the US dollar more sharply in either direction,” he added.
Following suite, Maybank IB projections show that the KLCI is expected to climb 11% this year to 1,660 points, supported by lower political risk premium, as well as stronger corporate earnings growth in the absence of the Cukai Makmur.
Although Malaysia’s GDP is expected to slow to 4.0% this year, it is still in the positive region and comparatively better than certain countries that face the risk of tipping into a recession, said the investment bank’s head of Malaysia and regional equity research Anand Pathmakanthan.
“We are more confident now that the market can sustain a higher valuation because we are seeing two key things which investors are cautiously optimistic on; one is the fairly seamless move to a new coalition government,” he said during the Maybank IB 2023 Market Outlook media briefing.
“Anything can happen in politics obviously, as we have seen in the last three years, but the sort of solid blocs that appear in the unity government give us some confidence that this government is here to stay at least for the next five years. The second thing is [although] GDP will slow this year, it is important to note that it is still positive to quite a big degree, 4%, compared to many other parts of the world which are going into recession in 2023; that is a very good outcome. With corporate earnings growth, the political risk premium in the market is likely to decline; these will lift the market towards our target,” he added.
Anand also noted that there is fiscal breathing room for the government to tackle subsidy matters, given that Petroliam Nasional Bhd (Petronas)’s financials remain healthy.
“There is some space for the government to take some time on this; a big driver of this space is the health of Petronas, which has recovered quite strongly over the last two years. So, the government doesn’t need to tackle this issue immediately; they can probably take some time to think about the most optimal way to scale back subsidies or perhaps change that policy,” he said.
In terms of price-to-earnings ratio, Anand said the KLCI is “looking quite attractively valued” at forward earnings multiple of about 13 times, versus the average of 16 times over the last two decades.
“Now, we are not saying that the market will go back to 16 times but we do think the market should be able to sustain 14 times, given the improving earnings and political outlook for the country,” he said.
Some of the sectors that Maybank has overweight ratings for 2023 include banking and technology, he added.
“We have a lot of tech stocks [in our research universe]; as interest rates in the US start to show peaking in the first or second quarter of this year, tech stocks would have a much better runway to perform, so it is something we would encourage investors to accumulate.
“Also, (with regard to the) consumer (sector), many stocks benefit from the reopening of the economy and with continued positive GDP growth this year, consumer stocks should be in the portfolio as well,” he added.
