Reforms, ringgit strength to lift KLCI to 1,670

Malaysian Reserve

a day ago

The narrowing spread between the US Fed's interest rate and Malaysia's OPR would likely benefit the ringgit and equity sentiment, says Goh
by AUFA MARDHIAH
THE primary stock market barometer FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI), is expected to reach 1,670 by end-2025, driven by improving global rate dynamics, moderate inflation and a bottoming out of valuation indicators, according to a local unit of a regional investment house.
CGS International Securities Malaysia Sdn Bhd (CGSI) research head Jeremy Goh Ping Wui said the FBM KLCI remained down 3.4% year-to-date (YTD) on a currency-adjusted basis, placing it mid-range among ASEAN peers.
However, the Shariah Hijrah Index recorded smaller losses, cushioned by its limited exposure to financial stocks that underperformed in recent months.
'As at end-July, only 0.5% of FBM KLCI constituents' revenue is derived directly from the US,' Goh said, noting the market's limited vulnerability to recent tariff announcements by US President Donald Trump.
The index closed at 1,549.11 last Friday, about 5% lower than the closing price of 1,632.86 on Jan 2.
Goh said Malaysia's semiconductor exports — a key risk sector facing a proposed 100% tariff — may see relief, as two-thirds of local output involves American firms likely to invest domestically in the US and qualify for exemptions.
He was speaking at the Invest Shariah Conference 2025, an event organised by CGSI and Bursa Malaysia, on Aug 7 in Kuala Lumpur.
Tariff Related Risks
On tariff-related risks, CGSI economics head Ahmad Nazmi Idrus told the same conference that while Malaysia sends 13.2% of its exports to the US, nearly half of these were already excluded from the 19% reciprocal tariff list announced earlier this year.
'Exports to the US grew faster than to China after the first trade war in 2018. But if the semiconductor tariffs escalate to 200% as proposed, Malaysia could be on the losing end due to its high reliance on electrical and electronics (E&E) products,' he said.
Ahmad Nazmi warned that Malaysia's trade surplus — which hit RM80 billion in 2024 — is now tapering off following the end of front-loading activities by US importers.
On Aug 6, Trump said the US will impose a tariff of about 100% on imports of semiconductors as part of his efforts to bring manufacturing back to the US. However, he announced some caveats, including that it will not apply to companies that are manufacturing in the US, or have committed to do so.
In response, Investment, Trade and Industry Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz told Parliament the next day that Malaysian semiconductor exports to the US were exempted from Trump's 100% tariff announcement.
'As of now, Malaysian semiconductor exports to the US remain exempt from these retaliatory tariffs…however, this exemption is subject to review and could change at any time depending on the US administration's policy direction,' he told the Dewan Rakyat.
Transhipment, OPR
Ahmad Nazmi also said policy-makers are increasingly wary of transhipment declarations being misused to gain tariff advantages under ASEAN free trade agreements (FTAs).
On the domestic front, Ahmad Nazmi noted that while headline GDP for the second quarter of 2025 (2Q25) was strong at 4.5%, consumption data has been weaken- ing. Household loan growth, including for credit cards, vehicles and property, has slowed, while non-performing loans have begun to rise.
On the other hand, Goh said the Sales and Service Tax (SST) 3.0 could weigh on corporate earnings, especially among manufacturers using intermediate goods affected by new tax rates.
CGSI projects a worst-case impact of 3.5% on FBM KLCI earnings over six months — or 7% annually — if costs are not passed to consumers.
However, Goh said the narrow- ing spread between the US Federal Reserve's (Fed) interest rate and Malaysia's Overnight Policy Rate (OPR) would likely benefit the ringgit and equity sentiment. In 3Q24, a rally in the ringgit preceded a 7% gain in the FBM KLCI as markets anticipated the Fed's first rate cut.
CGSI highlighted attractive valuations, with the FBM KLCI trading at one standard deviation below its five-year average and the market cap-to-GDP ratio — or 'Buffett Indicator' — again near its historical bottom of 52.7%. Historically, a rebound of 6% to 20% tends to follow such troughs within one to three months.
Foreign shareholding in Malaysian equities dropped to a record low of 19% in July. Goh estimates that even a partial reduction in underweight positions could bring in RM12 billion in foreign inflows.
Meanwhile, domestic funds remained relatively liquid, with room to redeploy cash into equities once sentiment turns.
On monetary policy, Ahmad Nazmi said Bank Negara Malaysia's (BNM) recent 25 basis points OPR cut was a pre-emptive move rather than a response to a collapsing economy.
'We're likely to see the ringgit stay within range in the near term. Weakness is more tied to the US dollar than to domestic fundamentals,' he said, adding that inflation could spike to 2.2% in July but remain manageable at around 2% for the full year.
CGSI expects FBM KLCI earnings to grow by over 5% in 2025 and 7% in 2026.
Its top Shariah-compliant picks include Tenaga Nasional Bhd (TNB), Gamuda Bhd, Telekom Malaysia Bhd (TM), Axiata Bhd, Mr DIY Group (M) Bhd, Fraser & Neave Holdings Bhd, Dialog Bhd, Duopharma Biotech Bhd and Optimax Holdings Bhd.
This article first appeared in The Malaysian Reserve weekly print edition