Rate cuts by Fed, Bank Negara could boost ringgit, foreign inflows
KUALA LUMPUR: The Federal Reserve and Bank Negara Malaysia (BNM) are expected to lower their benchmark rates in the second half of 2025 (2H25), with a projected 50 basis point cut in the federal funds rate (FFR) and a 25 basis point reduction in the overnight policy rate (OPR).
According to Hong Leong Investment Bank Bhd (HLIB), this could narrow the FFR-OPR spread, strengthen the ringgit, and attract foreign capital into Malaysia.
HLIB noted that foreign shareholding on Bursa Malaysia is at a record low of 19.2 per cent, indicating the market is underowned. At the same time, the Employees Provident Fund (EPF) continues to prioritise local investments, with 62 per cent of its funds allocated domestically in the first quarter of 2025 (1Q 2025), just below its 70 per cent target.
This strong domestic focus is expected to support the performance of the FBM KLCI, HLIB said in a research note.
In this environment, large-cap and index-heavy stocks, particularly banks, which account for 41 per cent of the KLCI, are well-positioned to benefit. HLIB maintains an 'overweight' stance on the banking sector and sees any market correction as a chance to accumulate high-beta stocks.
HLIB has kept its 2025 KLCI target at 1,640, expecting a volatile third quarter followed by a more stable fourth quarter. While external risks persist, such as Middle East tensions and uncertainty over US trade policies, the market appears less sensitive to such issues.
"That said, markets are increasingly desensitised to Trump's rhetoric and peak trade uncertainty is behind us. Also, the Israel-Iran clash is likely transient (on ceasefire), with history suggesting markets typically look past such military tensions after 10-15 days," the firm said.
HLIB added that fading investor enthusiasm for 'US exceptionalism' may prompt a global asset reallocation, to Malaysia's advantage.
On the macro front, HLIB maintained its 2025 GDP growth forecast at 4 per cent year-on-year (YoY), slightly below the official projection of 4.5 per cent to 5.5 per cent, due to persistent US policy uncertainty.
It also revised its 2025 consumer price index (CPI) forecast downward to 2 per cent YoY from 2.7 per cent, citing subdued inflation and a measured approach to subsidy removal.
"As such, we reiterate our view that BNM could cut the OPR by 25 basis points in 2H 2025," it added.
Looking ahead, HLIB remains positive on several key investment themes for 1H 2025, including the recovery of tourism, expansion in data centres, and Johor's continued growth momentum.
For the second half of the year, it introduces the "silver economy" as a new investment theme, with beneficiaries including private hospitals, banks, insurers, and 99 Speedmart, a retail player seen as well-positioned to tap into the ageing population trend.
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