KUALA LUMPUR: The strengthening US dollar is expected to pull down the ringgit back to the RM4.30 level, according to DBS Bank.

“We are taking a contrarian view on the foreign exchange (FX), as we see more upside on the US dollar.

“We believe that there will be a rebound in the US dollar in the first half of 2018. This is mainly on the widening rate differential with the US Fed (Federal Reserves) embarking on a gradual rate hike. We think that it will be a US dollar story in the next couple of months,” said DBS Bank’s senior investment strategist, Jason Low, said during the Economic Outlook 2018, organized by the Malaysia New Zealand Chamber of Commerce (MNZCC) and La Camara, the Malaysian Spanish Chamber of Commerce & Industry.

Low cautioned that despite the recovery of the ringgit recently, the stronger US dollar could see the ringgit fall back to RM4.34 against the US dollar.

On Malaysian equities, Low pegs his FBM KLCI’s annual target at 1,870. According to him, one of the main concerns and drag to the Malaysian equity market in the past year was the absence of earnings growth.

The stronger economic growth seen in 2017 did not filter down to the listed companies’ earnings, Low noted. “We are looking at 10.6% earnings growth for this year and if that comes trues, there would be a very positive picture for Malaysian equity market,” he said.

“On an absolute basis, we are positive on the Malaysian equity market but on a regional level, we’re underweight Malaysia as there are other opportunities in the market.

“We see the KLCI hitting 1,870 on the back of an attractive valuation. Currently, the index is trading at about 15 times the forward P/E (price-earnings ratio),” Low added.

The sectors that DBS Bank prefers include banking, oil & gas, selective technology or semiconductor companies as well as tourism. He pointed that the oil & gas industry should see a recovery on the back of higher oil prices while tourism should see support from the arrival of Chinese tourists.

Low expects crude oil prices to strengthen in the near-term. Brent crudes are trading at US$70 per barrel as of press time.

He, however, pointed that the upside will likely be capped and should see a return to a range of US$40 to US$65 per barrel level in the medium-term.

He explained that the strength seen in the oil price currently was mainly due to the slow re-entry by the shale players, which were taking some time to go back into operation due to huge debt levels. However, Low shared that it is a matter of time before the shale players return into the market and create an excess in supply.

Among some of the risks to the positive outlook for the equity market are the heightening geopolitical tension involving North Korea and the US, a potential global trade war, an upside surprise to inflation if oil price sustains above the US$70 level and also a surge or faster than expected rate hikes by US Federal Reserve.