Ringgit rings in changes

WITH the ringgit rallying as much as 12.7% during the third quarter this financial year (3Q24) to close at 4.1220 to the dollar, foreign exchange (forex) losses and gains were the dominant factor in terms of reported earnings for corporates with overseas assets and liabilities as well as income and expenses.

The main beneficiaries of the ringgit’s strength were companies like Capital A Bhd (RM2.27bil), Tenaga Nasional Bhd (RM1.11bil), Axiata Group (RM1.03bil), Genting Malaysia (RM602mil), Genting (RM485mil), IOI Corp (RM384mil) while forex losses were reported by PETRONAS Chemicals (RM1.11bil), YTL Power (RM292mil) and YTL Corp (RM281mil).

Overall though, the 3Q24 reporting quarter was rather disappointing, as the strong earnings growth of the first two quarters lost its momentum during the quarter, which led to lower earnings growth expectations for this year. Bursa Malaysia’s target for 2024 and 2025 was also cut. Some 18.2% of companies reported better-than-expected results but then, 30.7% were disappointing, a disappointment ratio of 1.68 times.

The current quarter did see a marginal improvement from the preceding quarter’s 17.9% of companies that surprised the market but the disappointment rate was much higher than the 2Q24 reported percentage of 22.7%, translating into a disappointment ratio of 1.26 times.

FBM KLCI fair value lowered to 1,654

Post 3Q24 earnings, earnings forecast were marginally lowered with corporate Malaysia now expected to see an increase of 13.3% for this year and 8.9% in 2025, down from 14.5% and 9.5% in the previous forecast.

Almost all broking firms lowered their FBM KLCI fair value forecast to 1,654 points from 1,732 points three months ago.

The lower FBM KLCI fair value for this quarter was a result of the lowering of the target by between 60 and almost 100 points among seven brokers, although one left its target unchanged at 1,690 points.

Banks led the way

The strong earnings momentum by Malaysian key banking stocks, which incidentally have the highest weighting on the FBM KLCI of more than 42% as at the end of last month, was the key saving grace.

Strong earnings momentum were delivered by Malayan Banking Bhd (Maybank), which is now poised to report a full-year net profit in excess of RM10bil, followed by Public Bank’s strong 12.1% year-on-year (y-o-y) increase in profits while RHB Bank Bhd and CIMB Bank Bhd delivered profit growth of 28.2% and 9.9% y-o-y for the quarter.

Consumer names delivered mixed results with MR DIY Group (M) Bhd, Fraser & Neave Holdings Bhd and Nestle (M) Bhd missing market expectations on higher operating costs, but both breweries and the sole tobacco company listed on Bursa Malaysia delivered improved performance on lower operating costs.

The automotive sector too was relatively strong, with MBM Resources Bhd and Sime Darby Bhd posting strong quarterly performance but the same cannot be said for Tan Chong Motor Holdings Bhd, which reported its eighth consecutive quarterly loss.

Press Metal Bhd saw a stellar performance on the back of higher aluminium prices.

Gaming companies were mixed as number forecasters saw reduced profits but the construction sector remain resilient, led by strong earnings growth from Sunway Bhd, where reported profit more than doubled y-o-y.

Glove makers remain under pressure, despite better sales volume, as the appreciating ringgit took the shine off the bottom line. The plantation sector came in mostly in-line while the property sector showed optimism with a respectable performance, although some saw one-off gains from land deals.

Among the utility stocks, TNB’s core earnings fell short of expectations while that of YTL Power too came in below expectations on lower margins but Telekom Malaysia showed improved performance while CelcomDigi Bhd missed consensus estimates on lower topline and higher overhead costs.

Quicker earnings growth

After accelerating 5.9% year-on-year (y-o-y) in 2Q24, the Malaysian economy saw a reduced growth momentum in 3Q24 as the economy expanded by 5.3% y-o-y, in-line with the guided advanced estimate by the Statistics Department.

On a seasonal-adjusted basis, Malaysia recorded a slower 1.8% quarter-on-quarter (q-o-q) expansion against the preceding quarter’s growth of 2.9%. In nominal terms, the Malaysian economy expanded by 3.8% q-o-q and 5.9% y-o-y to RM490.6bil in the Q324 period.

For the cumulative nine-month period, the Malaysian economy grew by 6.1% y-o-y.

As for earnings growth, corporate Malaysia’s earnings momentum was much quicker than nominal gross domestic product growth, as earnings expanded 5.6% y-o-y, while for the nine months, net earnings jumped 14.1% y-o-y. However, the momentum on a q-o-q basis was negative as earnings fell by 2.8%.

Crystal gazing into 2025

As the year comes to a close, it is an opportune time to reflect on two key factors that could lead to a higher FBM KLCI close from last Thursday’s close of 1,615.64 points.

Firstly, as we are into the month of December and the change in the index-constituents has just been confirmed with both Genting Bhd and Genting Malaysia exiting the index, with Gamuda Bhd and 99 Speed Mart Retail Holdings Bhd taking over and there will be some rebalancing among portfolio managers between now and the index-rebalancing effective date on Dec 23.Second, as the market is up some 11.1% year-to-date, there is opportunity for some of the larger institution funds to lock-in their gains.

This includes the Top 5 best-performing index stocks, which are YTL Power International, which is up 48.4% year-to-date; CIMB (+40.0%); TNB (+35.5%); Sunway (+28.8%) since the inclusion of the company in the FBM KLCI in June 2024; and QL Resources Bhd (+27.1%).

The constituents that may see some buying support that has been battered down include PETRONAS Chemical, which is down by 32.5% year-to-date; Nestle (-17.0%); PPB Group (-9.7%); CelcomDigi (-9.6%); and Maxis, which has dropped 9.1% this year.

Watch the ringgit

Year-to-date, the ringgit is up by 3.6%. However, from its weakest point, it has gained 7.7%. At the same time, the ringgit has now lost some 7.4% in value from when it closed at its highest level at the end of 3Q24. The dollar index, on the other hand, which was last seen at 106.16 is up approximately 4.8% year-to-date and regained much of its lost ground after hitting a low of just over 100 in late September.

As the dollar has again regained supremacy under President-elect Trump, any imposition of tariffs on imported goods, or change in inflation and interest rates expectations, will have an impact on the dollar and its relative value.

Portfolio outflows accelerated

Within the fixed income space, we saw some RM11.4bil outflow in the month of October, which has now reduced the net foreign inflow to just RM7.2bil for the first 10 months of the year.

One key reason for the strong outflow – the largest since the RM12.3bil posted in March 2020 – is the currency gains that some of these foreign funds would have made as the ringgit rallied strongly in the preceding month, on the back of expectations that the US Federal Reserve would be aggressive in its rate cut moves for the rest of the year and into 2025.

In the equity market, the month of October and November were washouts as some RM4.87bil left the local bourse, of which, some RM3.1bil outflow was recorded in November alone. This was the highest monthly outflow since March 2020 as foreign investors took profit on the local bourse on the back of a Trump win.

For now, the market’s attention will switch towards window dressing activities, which will likely be muted, as institutional funds would rather lock-in the gains for the year if they have not done so.