OPR cut likely to be negative for the KLCI, says CGS-CIMB Research

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KUALA LUMPUR (Jan 23): CGS-CIMB Research estimates the 25-basis-point (bps) cut in base lending rate could lower its 2020 KLCI earnings estimates by 1.5% and cut the research house’s end-2020 KLCI target of 1,636 by 25 points.

In a strategy note Jan 22, the research house said it expects another 25bps cut this year.

“Timing of the next rate cut is data dependent and may come earlier than our base case assumption of 2H20.

“Potential beneficiaries of the overnight policy rate (OPR) cut include the property, auto, and consumer sectors. The banking sector is a potential loser,” it said.

CGS-CIMB said OPR cuts are positive for cyclical sectors such as property (top pick: Sime Darby Property Bhd), auto (top pick: Bermaz Auto Bhd), and consumer (top pick: Power Root Bhd) due to the increase in consumers' disposable income.

However, the research house said it does not expect the impact to be significant.

It said a rate cut is also positive for companies with high ringgit borrowings as it will result in lower interest expense.

“An OPR cut is negative for banks, as the downward repricing of lending rates has historically been wider than the decrease in deposit rates, leading to potential narrowing in the banks’ net interest margins.

“It is also negative for companies with high net cash balances as it will result in lower interest income,” it said.