This article first appeared in The Edge Financial Daily on June 25, 2018
KUALA LUMPUR: At first glance, given the way the ringgit has weakened in value compared to the US dollar, export-oriented companies might seem like the biggest beneficiaries.
So far this year, the local currency has dropped 3.6% against the US dollar from its peak of 3.862 on April 2. It closed at 4.0022 last Friday.
But as international trade tensions between China and the US again escalate, the ringgit’s slide has provided Bursa Malaysia-listed companies from traditional export-oriented sectors like technology only a marginal benefit, said Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew.
“Tech companies will generally be affected if the trade war intensifies as it is a global industry connected to a worldwide supply chain. Considering this, the weakening of the ringgit may not be as beneficial as usually expected,” he told The Edge Financial Daily.
Pong also noted that the rate of decline in the ringgit this time is not as rapid as it was in 2015. “So, I don’t see it being as damaging to the overall business environment.”
He said the local economy has also somewhat benefited from an interest rate hike announced by the Bank Negara Malaysia by 25 basis points to 3.25% in January. This has managed to support the ringgit as the US dollar strengthened against most emerging Asian currencies, he added.
The ringgit was Asia’s worst-performing currency in 2015, declining by 23% against the US dollar. The fall in the local currency, while negative for the man on the street and companies that rely on imports for their operations, boded well for exporters like furniture makers, glove makers, tech and semiconductor industries.
Hong Leong Investment Bank Research said a weak ringgit will be beneficial to export-oriented tech companies with majority of revenue denominated in US dollars. The research firm has revised down its US dollar/ringgit projection to 3.90-4.10, from 3.85-4.00 previously, for the rest of the year.
However, its analyst Tan J Young pointed out that the escalating US-China trade tension undeniably will send shocks to the global tech market.
If this face-off prolongs, he opines that this will impact outsourced assembly and test (OSAT) companies more than equipment suppliers.
“According to a warning from the Semiconductor Industry Association last week, US-based fabless semiconductor players such as Qualcomm, Broadcom, and Skyworks may end up paying the tariff on their own products since majority of their integrated circuits are fabricated in China. With the 25% higher cost, they may re-evaluate their outsourcing supply chain and bring the manufacturing back to the US, which will be easily justified if government incentive can be secured,” said Tan in a report last Thursday.
“After all, this is also aligned with US President Donald Trump’s administration to create more jobs. But if this materialises, it will negatively disrupt the OSAT ecosystem,” he added.
Tan sees the US-China trade tension having less impact on Malaysian equipment vendors as majority of the players manufacture locally and export worldwide, thus partially insulating them from this trade war.
“[In fact,] should the cost to source equipment from the US surge or the US restricts technology transfer to China, local suppliers may eventually enjoy higher demand,” he added.
While global sales and capital spending are expected to see moderate growth, Tan said he prefers to be more cautious as tech stock valuations are currently very rich. “There lacks near-term catalyst, while the sector will be impacted by higher material costs and trade war uncertainties.”
Year to date, the Bursa Malaysia Technology Index is down 14%. Globetronics Technology Bhd has fallen 21% to close at RM2.21 last Friday, while shares in Inari Amertron Bhd, however, are up 1.62% this year to close at RM2.27 last Friday.
Kenanga Investment Bank Bhd head of research Chan Ken Yew is holding off any changes to his earnings forecasts for now, noting that the recent ringgit slide is not significant to have an impact on export-oriented stocks.
Chan is keeping his ringgit forecast of 3.900 against the US dollar on average until the end of the year.
“I believe the export-oriented companies are more concerned over the potential trade war between the US and China that has caused jitters in regional markets,” he told The Edge Financial Daily.
Chan said investors should focus more on the fundamentals of the companies and the trend of global demand factors for their products than on short-term currency fluctuations.
Socio-Economic Research Centre executive director Lee Heng Guie expects the currency fluctuations to remain amid the ongoing internal and external headwinds.
He has revised down his US dollar/ringgit projection for the same reasons, expecting the ringgit to trade between 3.900 and 4.000 for the rest of the year from his initial estimate of 3.800 to 3.900.
On the local front, Lee said the ringgit has come under selling pressure since the shocking victory of the Pakatan Harapan coalition in the 14th general election on May 9 as foreign investors look to rebalance their portfolios amid ongoing uncertainty over policy direction.
Lee sees the hesitant sentiment remaining at least until early November when the Pakatan-led government is expected to table Budget 2019, in which it has committed to maintaining the fiscal deficit target of 2.8% against the gross domestic product. It is hoped that the budget announcement will provide some clarity to investors, he added.
The currency situation has also been aggravated by the rising US Treasury bond yields, which have pulled investors away from emerging markets. Last week, the US Federal Reserve (Fed) raised its target Fed funds rate by 25 basis points to 2% from 1.75%, the seventh rise from near-zero rates since late 2015. Another two rounds of rate hikes are expected by the end of the year.
This, Lee said, will put pressure on central banks in emerging markets to guard their monetary policy to manage the impact of market volatility on currency without the expense of capitalising potential global growth.
“It will be a tough balancing act to pull off,” he added.