KUALA LUMPUR (Aug 26): Nomura Global Markets Research has upgraded Malaysian stocks to 'overweight' from 'neutral', as part of its equity strategy call that an imminent US rate cut will stoke a rally in emerging markets.

Constructive domestic factors include Malaysia’s solid economic growth, increasing foreign direct investment (FDI), supportive domestic liquidity, supportive market internals and a strengthening ringgit, the research house said in a note, which also upgraded Indonesian stocks.

Nomura's 2024 gross domestic product growth forecast for Malaysia of 5.2% is above consensus estimates of 4.5%, according to Bloomberg data.

Key themes underpinning the Malaysian stock market include increasing FDI on supply-chain shifts, as well as cloud and artificial intelligence (AI) data centre infrastructure by major tech players, it added.

"Key risk to our view — if the AI theme slows or rolls over, we think it could also negatively impact some of Malaysia’s high-flying AI/data-centre-related names that are part of the index," it said.

The research house thinks the Malaysian market is currently trading at reasonable valuations at 14.1 times forward price-earnings ratio, which is below its post-2015 average of 15 times.

The Malaysian market could benefit from supportive domestic liquidity from government-linked investment funds and supportive market internals, Nomura said.

This includes very light foreign investor positioning, rising stock market trading volumes driven by institutional flows rather than retail, as well as resilient and stable index earnings.

Lastly, Nomura also said its foreign exchange strategy team is calling for broad US dollar weakness in Asia in the coming months, and this would aid returns for US dollar-based investors.

Nomura’s indicative stock ideas for Malaysia include CIMB Group Holdings Bhd (KL:CIMB) based on macro play and an improving return on equity trajectory, Gamuda Bhd (KL:GAMUDA) in view of order book growth as well as renewable energy exposures, as well as Pentamaster Corp Bhd (KL:PENTA), a long-term beneficiary of the fast-growing automotive and medical segments.