KUALA LUMPUR (May 22): HSBC has an “underweight” rating on the Malaysian equity market in the second half (2H) of this year as its earnings growth expectations remain muted, says its head of equity strategy for Asia-Pacific Herald van der Linde, noting that local market returns have lagged behind their regional peers.

“We actually are more negative towards Malaysia. While it is a relatively stable market, we find that other (regional) markets simply have a little bit further upside," he said at HSBC's Asian Outlook media briefing for 2H 2023 on Monday (May 22).

“On the macro point of view, it (Malaysia) looks good. It's just a couple of other markets that are slightly better (compared with Malaysia),” he said, adding that the Malaysian equity market is currently “not so much of a standout” compared with its Asian peers such as Indonesia, India and China.

Explaining further why Malaysia is "less standout" compared to its regional peers, HSBC said that this is due to the benchmark FBM KLCI constituents being largely dominated by banks, accounting for about 40% of the index. "This has remained out of favour, especially when growth among regional peers in Indonesia and Singapore remained more attractive," HSBC said when contacted by The Edge.

The KLCI has slipped 3.7% year to date to close at 1,419.00 points on Monday (May 22) from 1473.99 points on Jan 3. HSBC is forecasting that the KLCI will end 2023 at 1,490 points.

Nevertheless, van der Linde sees “exciting growth” for the Indonesian and Indian markets, particularly in the countries’ earnings growth for the next two or three years.

“We are 'overweight' on China, India and Indonesia. We are 'neutral' on Taiwan and South Korea, and a little bit 'more cautious' for the rest of the region,” he said.

Trade headwinds may affect ringgit

The ringgit may be affected by intensifying trade headwinds this year due to lower commodity prices and a global electronic slump, according to HSBC head of Asian foreign exchange (forex) research Joey Chew.

“I think this year, the trade balance could potentially shrink a little bit because commodity prices are not rising anymore, and then we have this electronics downturn globally," she said.

As such, Chew foresees that this could affect the ringgit in 2H2023.

“The trade balance did not benefit the ringgit last year, and it struggled to turn the lead this year. As long as the yields in Malaysia remain lower than the US, I think this is the real hurdle for Malaysia,” she said.

Similar to China’s renminbi (RMB), she said that both RMB and the ringgit are “closely related”, hence, both will be at similar levels to each other.

Chew expects Asian currencies being “held back” by three factors including lower US yields, weak exports and forex accumulations.

“For 2H2023, since the US Federal Reserve (Fed) has yet to turn dovish, we think the highest yielding currencies in our region is still attractive for the 2H23,” she said.

Among HSBC's favoured currencies in Asia are the rupiah, followed by the peso.

HSBC expects BNM to hold policy rate steady at 3%

Following the Bank Negara Malaysia (BNM) recent 25 basis point rate hike — after pausing for two consecutive meetings — HSBC now expects BNM to hold its policy rate steady at 3% in its forecast horizon.

“We actually don't have any more hikes (expectation) by BNM, but we also don't have any cuts for Malaysia over the forecast horizon, which is until the end of 2024,” said HSBC chief Asia economist and co-head of Global Research Asia Frederic Neumann.

"BNM’s optimism on domestic growth resilience, which in turn likely supports core CPI, is the main reason for the decision," he added.

“Malaysia, we saw in the first few months of the year, is relatively resilient in domestic demand, particularly on the private consumption side. Malaysia's outlook as determined by trade is gaining from the global market share, and as long as trade does not entirely dissipate — in terms of a sharp decline in exports — (we expect) Malaysia to deliver a gross domestic product growth of 4% this year, that is, after the 8.7% growth recorded last year, which would still be a strong performance."