Markets
Winners and losers of a strong ringgit
Stephanie Jacob 
Last year saw the ringgit staging a revival by appreciating 9.9% against the greenback
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AROUND mid-2015, the ringgit began a slump that was driven by a raft of issues. The most significant drag was tumbling crude oil prices. This was compounded by the US Federal Reserve’s move to normalise interest rates.

Back then, prospects for the local currency was bleak in view of several lingering concerns closer to home. Political uncertainty and an unexciting economy did nothing to help give it a boost.

All-in, the ringgit’s slump had a far-reaching impact on the local economy and the bourse was not spared. Nonetheless, among the very few winners locally were the export companies as their goods and services became more attractive due to the cheaper ringgit.

This was mirrored on the stock exchange and export counters drew the attention of investors.

Last year saw the local currency staging a revival – albeit from a low base – by appreciating 9.9% against the greenback. This makes it the strongest performer against regional peers such as the Indonesian rupiah, Philippine peso, Singapore dollar and Thai baht.

Nevertheless, the ringgit remains far off from its position in mid-2015 prior to its drastic depreciation. By that measure, it remains the second worst performer among its neighbours behind only the peso.

 

Ringgit uptrend sustainable

Moving forward, the ringgit is widely expected to continue its improvement this year buoyed by better fundamentals in the local economy.

“The ringgit rally seen last year is expected to continue in 2018, strengthening to a full-year average of RM4.04 compared to RM4.18 in 2017,” wrote AllianceDBS economist Manokaran Mottain in a recent report.

He further cited stronger capital inflows, improving domestic macroeconomic conditions and a potential interest rate hike as the likely contributing factors.

iFAST Capital Sdn Bhd research analyst Tan Wei Yine concurs that the current uptrend of the ringgit is reflective of a stronger economy on the domestic front. On the same note, the same factors driving the stronger ringgit should also be positive for Bursa Malaysia.

“The stronger macroeconomic conditions coupled with a global economic recovery has boded well for our economy thus far, and the continuation of this trend should be a positive input for the local bourse,” he tells FocusM.

Hong Leong Investment Bank (HLIB) Research also sees the stronger ringgit as a boon for many local players. “The stronger ringgit augurs well given most businesses are heavily focused on the domestic scene,” it pointed out in its recent 2018 Outlook report.

 

Impact on exporters

However, this raises the question of what a stronger local currency means for exporters and by extension, export stocks. There was an indication of its impact in November’s export data (the latest available data) which recorded a slower pace of export growth.

“Malaysia’s exports hit the brakes mildly in November after it slowed to 14.4% year-on-year [October: 18.9%], hurt primarily by the stronger ringgit,” noted Public Investment Bank (PIVB) analyst Rosani Rasul. 

A similar view that the ringgit appreciation would be negative for exporters was adopted by the HLIB team. “A stronger ringgit [weaker US dollar] would be negative for sectors such as tech and wood-based manufacturers given their export centric businesses with US dollar denominated revenues,” it noted.

However, the impact of stronger domestic currency on exporters might prove to be limited, according to iFAST Capital’s Tan. Although acknowledging that the ringgit plays an important part in the formulation of exporters’ profits, it is also important to consider the demand factor.

“Currently, we expect continuation in the demand for goods and services, particularly within the electronics and electrical products [E&E] as well as oil and gas segments,” he suggests.

 

Global economic recovery

Stressing that these were the segments which underscored exports growth last year, Tan expects them to continue doing well this year by riding on the current global economic recovery.

“While the current ringgit strength could be a bane to exporters, we think revenues and profits may be compensated by higher volume and purchase orders coming from higher global aggregate demand,” he argues.

Offering a similar outlook, PIVB’s Rosani opines that while the ringgit’s strength will have an impact, it could well be mitigated by “booming global manufacturing activity”. This would ensure sustainable demand for exports and might prove to be a “tailwind for 2018”.

Therefore, the ringgit strength should not be the only consideration of investors mulling whether or not to buy into export stocks. Rather, iFast’s Tan advises investors to pay close attention to the individual company’s revenue streams and its earnings sustainability.

“In the current market environment, it is likely that valuations are creeping towards higher levels and overly-optimistic earnings expectations may cause share prices to be susceptible to correction,” he points out. Investors should refrain from merely chasing returns.

 

Ringgit-hedged assets

On the other hand, investors looking at foreign assets should look at ringgit-hedged assets to mitigate the upside risk stemming from the local currency. “This could reduce the risk of currency translation losses eating into their investment gains.”

Meanwhile, the biggest beneficiaries of a healthier ringgit will be those who rely on significant import content or have significant foreign debt. This includes the automotive sector, aviation, media and power, says the HLIB report.

“Importers, particularly consumer-related counters are among the beneficiaries from the ringgit’s strength,” reckons iFast’s Tan.

“A stronger ringgit generally translates to lower cost of import, and the improving spending sentiment among consumers serves as an additional catalyst to drive top-line growth for these counters,” he adds.



This article first appeared in Focus Malaysia Issue 267.