Stronger ringgit to weigh on export-based counters

The impact of a higher ringgit against the US dollar will depend on the level of its appreciation and sustainability


The stronger ringgit is forecast to eat into the margins of export-based stocks next year as the US dollar-denominated revenue is converted to the local currency.

Companies with hedging policies in place supported by sound business operations should be able to manage the reversal of foreign- exchange (forex) gains, while those without any form of safeguards could see a material impact on their stock performance said analysts.

The impact of a higher ringgit against the US dollar will depend on the level of appreciation and how long it can sustain.

“We cannot quantify the impact yet, because we do not know how much the ringgit is going to appreciate by,” an analyst told The Malaysian Reserve (TMR).

“What we observe generally when there is a stronger Malaysian currency is that export-based stocks — including technology, glove and plantation counters — will be worse off than stocks whose revenue is not denominated in US dollars.”

The analyst said while exporters will comparatively report lower profit and margins as a result of the stronger currency compared to when the ringgit was weak, companies’ performance in the market should be determined on a case-by- case basis.

“Some companies will be able to pass on the extra cost to consumers, something which glove manufacturers frequently practise, while others have a hedging policy in place.

“However, not all companies have this policy and how much they are to be impacted by the stronger ringgit will depend on its level or appreciation,” the analyst said.

Affin Hwang Investment Bank Bhd senior director and head of equity capital markets Arvin Chia said the ringgit appreciating 5% to 10% to the dollar will not move “the needle significantly”.

“At a 10% to 15% appreciation is when we start seeing a higher impact on export-based stocks and companies with higher exposure to forex gains and losses.

“Companies who find it difficult to pass on the additional costs are to be more affected than others,” Chia told TMR.

He cautioned against grouping together all export-based stocks under the same blanket, as some sectors have performed well even without the forex gains.

“The technology rally we observed in the country was not driven by forex gains, but from the global hype and demand for the industry, especially in the semiconductor space,” he said adding many tech stocks were supported by strong financial numbers.

He said companies with US dollar-denominated debt, borrowings and bonds will also benefit from a stronger ringgit.

The Malaysian currency tested one-year highs against the greenback over the course of last week, closing at RM4.1075 last Thursday, as the currency market reacted positively to the country’s strong third-quarter economic growth number.

Buoyed by the anticipated Overnight Policy Rate hike as early as January next year, and with the market not ruling out an additional rate hike, the ringgit is expected to remain supported throughout 2018 on the back of a bullish economic outlook.

The ringgit was at RM4.1163 against the US dollar last Friday after rising significantly in the past two weeks from RM4.228 on Nov 8.