KUALA LUMPUR (Jan 26): CIMB Investment Bank Bhd said it is maintaining its FBM KLCI target at 1,880 points, despite Malaysia's interest rate hike. This is because CIMB expects the positive earnings impact on banks to offset the negative impact on other sectors in the KLCI.

Yesterday, Bank Negara Malaysia raised the overnight policy rate (OPR) by 25 basis points to 3.25%. Today, CIMB said potential winners from the OPR hike include the banking, gaming and semiconductor sectors.

"Rate hikes are negative for cyclical sectors such as property, auto, as well as consumer, due to lower disposable income. It is also negative for companies with high gearing in ringgit borrowings, as it will result in higher interest expense.

We observed that the KLCI rose when interest rates were cut and fell when interest rates were raised during the 1997 to 2000 period. However, this is not always the case, as we noted that KLCI uptrend remained intact when interest rates were raised in 2010, 2011 and 2014. 

"We are of the view that market will be able to digest the 25bp OPR hike, as we estimate net gearing for corporate Malaysia is only 24.6%, while we estimate the positive earnings impact on banks could offset the negative impact on the other sectors in KLCI," CIMB said.

The real estate investment trust (REIT) sector is also a closely watched sector after the OPR hike. MIDF Amanah Investment Bank Bhd said Malaysian REITs' individual fundamentals are expected to outweigh the impact of the rate hike.

"We are neutral on the impact the rate hike has for REITs under our coverage. Although borrowing costs are expected to increase for REITs with high levels of floating rate loans, most of the REITs under our coverage see limited impact from the rate hike, as 80% or more of their debts are based on fixed rates," MIDF said.