Highlights

US Interest Rate to Rise Soon

• In the US Federal Open Market Committee (FOMC) meeting on 26 Jan 2022, the US has maintained its policy interest rate at near 0%. However, it was mentioned that “an interest increase would soon be appropriate”. More importantly, net asset purchases should end in early March. The Federal Reserve’s statement further explained that “against a backdrop of elevated inflation and a strong labour market, our policy has been adapting to the evolving economic environment, and it will continue to do so”.

Our In-house View:

• Our economist is maintaining the view that the US is now expected to raise its borrowing costs three to four times in 2022 and continue to do so until it reaches 2.50%–2.75%. For Malaysia, Bank Negara Malaysia is also anticipated to pave the way for higher interest rates in 2H2022, with 1–2 rate hikes by 25 basis points in each hike. We believe that economic growth momentum, rising inflation and addressing interest rates differential would be the major factors supporting a rate hike.

• Inflation is expected to stay elevated in the short term although it could be on a decreasing trend through the year. However, one could be strongly underestimating what higher power prices could do to inflation, corporate earnings and growth across the global economy.

Positive Impact to Banking and Glove Sectors

• Banking sector. Higher interest rates will increase banks’ net interest margins (NIMs). Loans will be repriced ahead of deposit rates. This will translate into higher net interest income for banks. On the sensitivity of interest rates, typically a 25bps increase in the OPR will expand banks’ NIM by 3–4bps and improve banks’ net profit of by 1–2%. Banks with a higher mix of floating rate and domestic loans will benefit more from OPR hikes. We have an OVERWEIGHT call on the sector.

• Glove sector. All three glove companies under our coverage are in net cash position. Hence, a higher interest rate will translate into higher interest income for glove companies. However, we maintain our NEUTRAL call on the sector as average selling price is still in a downtrend.

Negative impact to auto, consumer, healthcare, insurance, oil & gas, property, REIT and technology

• Technology sector. Stocks under the tech sector are primarily growth stocks, which are more sensitive to changes in the interest rate or required rate of return. Furthermore, notwithstanding that some companies within the sector are in a high net cash position (which is a form of equity), the capex-heavy industry will be impacted by a lower return on capital employed (ROCE). One silver lining in that rising interest rate environment is that it will create a higher barrier of entry for new entrants and current established players may continue to thrive based on their competitive advantage. For other sectors, please see Exhibit 2 and Exhibit 3.

Maintain 2022 FBM KLCI Target of 1,600

• We maintain our end-2022 FBM KLCI target of 1,600 points. Our target forward PE is unchanged at 15.6x which is pegged at -0.5 standard deviation (SD). The discount is to reflect the negative earnings growth projected for the total FBM KLCI component earnings in 2022 and a higher stamp duty for share transactions which will affect trading volume. For 2022, we expect FBM KLCI earnings to decline by 3.5% due to lower earnings projection for the glove and plantation sectors.

Source: AmInvest Research - 28 Jan 2022