Optimism as tariff dust settles

THE United States has announced its tariff rate for Malaysia, and it is a softer blow than expected.

With that, Malaysia’s equity market is shifting its focus from uncertainty to opportunity, with brokerages pointing to a stabilising outlook for the remainder of 2025.

The recently announced 19% reciprocal tariff on Malaysian exports was not as bad as feared – and analysts believe much of the negative sentiment has already been priced in.

CGS International (CGSI) Research, for one, believes the market is now ready to move past the “tariff fatigue”.

“With Malaysia’s tariff at a rate lower versus Liberation Day (when it was at 24% and later hiked to 25%) and also on par with most of its Asean peers – we reckon that investors will start to move past this ‘tariff fatigue’,” it says.

In CGSI Research’s view, the stage is set for a recovery.

“We envision a market recovery in the second half of 2025 on the back of ebbing tariff tensions and the US Federal Reserve unpausing its rate downcycle, alongside a domestic backdrop of economic reforms,” it explains.

While still a negative in absolute terms, the 19% rate announced by US President Donald Trump places Malaysia in line with regional peers, as Asean countries like Vietnam and Indonesia were hit with similar tariffs in the 19% to 20% range.

Cautiously optimistic

For TA Research, the technical picture remains intact, albeit with a slight trim to upside projections.

“We maintain our view that the bear market cycle, which bottomed out at 1,207 low in March 2020, has since transitioned into a new bull market phase for the FBM KLCI,” it says.

TA Research has since revised its upside targets modestly lower, expecting a range of 1,561 (worst case) to 1,733 (best case) by end-2025.

Its base case now stands at 1,633 points, corresponding to the 61.8% Fibonacci retracement from the previous market peak.

CGSI Research is equally constructive on the benchmark’s prospects, maintaining its year-end 2025 FBM KLCI target at 1,670. The house research also notes that record-low foreign shareholding – which dipped to just 19% in July – provides “downside cushion” should volatility return.

However, the new tariff regime brings mixed implications for Malaysia’s sectoral outlook.

In the technology space, CGSI Research expects headwinds.

“We feel the overall reciprocal tariff landscape will dampen demand given the inevitable rise in prices for end-products, and slow down global capital expenditure deployment, particularly in legacy growth industries,” it cautions.

Malaysia’s technology sector is particularly vulnerable, as “back-end testing equipment is not included in the US tariff exemption list”.

Compounding the risk is the potential for new Section 232 tariffs on semiconductors, with an outcome expected in mid-August.

On a more positive note, Malaysian glove manufacturers could benefit from relative pricing advantages.

“The asymmetric tariffs imposed by the United States on Malaysia (19%) versus China (30% to 50%) give Malaysian manufacturers a pricing advantage,” CGSI Research says.

However, the threat of Chinese players dumping inventory into non-US markets remains a risk.

For agribusiness, the impact is marginal, CGSI Research notes: “Only 2.3% of Malaysia’s palm oil exports were to the United States in 2024; and an identical 19% US tariff rate on both Malaysia and Indonesia also levels the playing field.”

Domestic focused

Despite global uncertainties, RHB Research takes a slightly more optimistic macro view.

“The reduced 19% tariff rate was in line with market expectations and as best as could be hoped for, given the baseline set at around 15%,” it says.

More importantly, the brokerage sees this development as a potential positive catalyst.

“The combined impact of the reduced US tariff rate and recent fiscal support measures could offer some upside lift to growth. Risks are now tilted toward 4.5% gross domestic product (GDP) growth.”

RHB Research points to increasing “sidelined liquidity” as a buffer and sees a window for investors to re-engage the market.

“We believe there are now stronger grounds to increase equity exposure, starting with liquid large caps and laggard names,” it says, while cautioning that “investors need to stay nimble and retain a preference for domestic-centric stock ideas”.

However, not all research houses are bullish.

Public Investment Bank (PIB) Research remains cautious on the FBM KLCI and expects the market to trade defensively.

“We believe there is still downside risk when more data supporting a weaker US economy are released in the coming months,” it says.

The brokerage maintains a year-end KLCI target of 1,560 and favours domestically-focused names.

“Our preferred big caps are Malayan Banking Bhd, Telekom Malaysia Bhd and Tenaga Nasional Bhd. For small caps, we like CCK Consolidated Holdings Bhd, SDS Group Bhd, Spritzer Bhd, Life Water Bhd and Cloudpoint Technology Bhd,” PIB Research states.

Even CGSI Research tempers its optimism with realism.

“Although the 19% tariff on Malaysia is incrementally negative, we see two areas that offer some degree of cushioning,” it says.

For one, the United States has already exempted some key electrical and electronics products, which reduces tariff-exposed GDP from 12.4% to 6.7%.

Moreover, “the aggregate revenue exposure of its coverage universe/KLCI to the United States is minimal at 2.4%/0.5%, based on 2024 numbers.”

For now, the local equity market seems to be taking the blow in stride, supported by reforms, liquidity and improving external optics.

The next few months – especially around the US-China tariff resolution and upcoming earnings season – could determine if that confidence turns into a meaningful rally.