KUCHING: Analysts of Kenanga Investment Bank Bhd’s research arm (Kenanga Research) view the recent hike in interest range could have a mixed impact although, theoretically speaking, interest rate hike should see negative impact to equity market.
However, it pointed out that the interest rate hike could widen the interest differential between ringgit and US dollar.
It added, this may cause strengthening in ringgit and higher foreign inflow, leading to an increase in liquidity and eventually support the domestic market.
Besides, it noted that the short-term positive price performance of banks should support the performance of benchmark index – FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) – as well.
“This is because banking sector accounts for circa 33 per cent of the index weighting,” the research arm said.
Kenanga Research also reckoned that the probability of another rate hike is relatively low and he still maintains his US dollar-ringgit year-end forecast at 3.21 (Average at
3.25).
Generally, Bank Negara Malaysia’s (BNM) move in raising the overnight policy rate (OPR) by 25 basis points to 3.25 per cent, after the Monetary Policy Committee (MPC) meeting came as a surprise to Kenanga Research as in its recent issued strategy report, its market outlook, sector calls and earnings estimates are premised on an unchanged interest environment.
As such, the research arm believed there is a need to examine sector calls for sectors that are sensitive to interest rate movement such as Banking, Malaysia Real Estate Investment Trust (MREIT) and Property as well as sectors that are sensitive to ringgit movement such as auto, electrical and electronics (E&E), gloves, plantations and shipping.
“Post the 25bps hike in interest rate, our view for sectors that are sensitive to interest rate and ringgit movement remain pretty much unchanged,” Kenanga Research affirmed.
“Recall that we have upgraded our sector rating for MREIT and transports & logistics to ‘overweight’ of late.
“At the same time, we also maintain ‘overweight’ call on gloves and plantations. We are, at the same time, ‘neutral’ on banking & non-bank financial, property developers and technology,” it said.
For the auto sector, the research arm explained that as rate hike further reinforces its conservative total industry volume (TIV) forecast of 668,900 units, which implies a two per cent growth on the back of the assumptions of the high base effect in the second half of 2013 (2H13) as it believed rate hike could put pressure on consumer spending and TIV growth in the 2H14.
As for the banking sector, Kenanga Research highlighted despite short-term benefits from reprising of loans, it was still concern over credit demand and loans growth, erosion of net interest margin (NIM), and higher credit cost in the longer run.
Regarding the property sector, while the research arm expected muted impact as the market had widely anticipated the move, it is more concerned on subsequent rate hikes.
“Meanwhile, Budget-2015 remains a question mark. Clearly, the third quarter of 2014 (3Q14) is clouded with uncertainties and lack of sector news flow while the risk-reward ratio is less attractive after the rebound in 1H14,” it opined.
On the E&E/technology sector, although the OPR hike could lead to a knee-jerk strengthening of ringgit versus dollar in the near-term, the research arm sees no impact to our tech companies’ earnings as it shared that its in-house economist still maintained the US-RM forecast.
“However, we do not rule out mild corrections in E&E companies’ share prices as most of them rallied strongly of late,” it said.
On its overweight calls, starting with the glove sector, Kenanga Research observed that while it could be mildly negative in the short-term, the long-term impact, however, should be muted.
“This is because glove players typically hedge their currency exposure on a consistent basis, hence in theory, any positive or negative fluctuations will be offset over time.
“Besides, glove players normally able to pass down their cost due to their bargain power,” it explained.
As for MREIT, the research arm does not expect the hike to have any significant impact on MREITs’ earnings as MREITs have taken pre-emptive capital management measures over the last two years.
“We also believe the impact of this round of rate hikes on Malaysian Government Securities (MGS) yield has been priced-in by the market.
“However, should there be further hikes over the next six to 12 months, this may threaten our valuations and thus sector call,” it said.
As such, Kenanga Research maintained its 10-year MGS target at 3.8 per cent, 20 basis points (bps) lower than current levels, on the premise of a possible European quatitative easing (QE).
Aside from that, the research arm expected the plantations sector to see interest rate increase to have a neutral impact on crude palm oil (CPO) prices as its economist has maintained his average US-RM rate.
However, it noted that sentiment could be affected as stronger ringgit is normally negative to CPO prices as it makes CPO more expensive against soybean oil which is priced in US dollar.
As for the transports & logistics sector, Kenanga Research believed that the sector would be affected, but that the impact of further strengthening of ringgit would be limited to currency translation losses, which could be minimal.
“For port operators, we opine that the total cargo volume handled is a function of both import and export cargo, therefore even any drops in export cargo could be offset by increase in import due to stronger currency.
For shipping lines, the driver for charter rates are linked to the global economy rather than the local economy and usually their earnings and cost base is in US dollar predominantly, therefore, shielding them from fluctuations in currency in terms of demand.
Overall, despite potential knee-jerk effects on share prices and change in investment sentiment, Kenanga Research believed the actual impact to banking, E&E, gloves, MREIT, property and shipping sectors could be minimal as the rate hike of 25bps should have no material impact to their earnings prospect.
“All told, we maintain our year-end index target of 1,960. We still believe that the domestic equity market is still a liquidity driven supported by ample underlying financial liquidity,” the research arm affirmed.
However, it noted that there are several negative factors that may potentially cap market upside and probably cause a market correction in 3Q14.
“In general, we prefer to adopt a Buy On Weakness (BOW) strategy with the ideal BOW levels at 1,835 and below,” it concluded.