This article first appeared in The Edge Malaysia Weekly on May 2, 2022 - May 8, 2022

THE recent weakening of the ringgit has cast a spotlight on the potential winners and losers from this development. The general rule is that exporters with low import content will benefit from services and products quoted in US dollars as a weak local currency will translate into higher revenue. Meanwhile, players that have a high import content will feel the pinch, especially when some players are unable to pass on the additional costs entirely to their customers.

The glove, furniture and plantation sectors are seen as the winners when the local currency depreciates. Is this really the case? And did their share prices strengthen in the past when the ringgit weakened?

When the ringgit depreciated 10.7% between August and September 2015, to a low of 4.4570, the FBM KLCI gained 2.3% during the period, with selected furniture stocks and glove stocks rising 26.9% and 9.5% each.

Furniture stocks also enjoyed a similar gain of 29.9% when the ringgit skidded 16.3% from April 2016 to January 2017, touching the 4.4975 level.

For April to November 2018, furniture stocks recorded a 7% rise as the ringgit lost 8.6%.

Valuation-wise, the average 12-month trailing price-earnings ratio (PER) of furniture stocks stood at about 12 times, compared with about 13 times six months ago.

Notably, Poh Huat Resources Holdings Bhd and Homeritz Corp Bhd delivered robust earnings in their latest quarterly results. Poh Huat saw its net profit surge 59.4% to RM15.35 million for the quarter ended Jan 31, 2022, driven by stronger profit margins.

Homeritz, on the other hand, recorded its highest ever net earnings of RM10.34 million for the December 2021 to February 2022 quarter. This prompted HLIB Research to raise its earnings forecasts by 8.9% and 9.1% for FY2022 and FY2023 to account for stronger sales volume arising from the group’s improved production planning and efficiency.

“The results were due to the higher-than-expected sales volume as well as the strengthening US dollar. We anticipate Homeritz’s strong order outlook as well as the current favourable US dollar to ringgit exchange rate to continue to positively contribute to earnings in the coming quarters,” the research house said in a note last Friday.

The share prices of major glove players registered positive returns, by as much as 23.4%, in most of the local currency weakening cycles between April and November 2018.

The correlation between currency movements and the plantation sector has not been strong. Over the past few years, plantation stocks generally did not move in tandem with the currency trend. Even their year-to-date gain of 33.1% was driven by the global commodities rally.

Areca Capital Sdn Bhd CEO Danny Wong says the electronics and electrical (E&E), petrochemical, and industrial sectors are also poised to reap the benefits from the weak ringgit.

“There were times when the E&E and glove sectors had a short-term play when the ringgit experienced a huge slide,” he tells The Edge.

However, the situation is different at this point of time, says Wong, as there are other factors that affect market sentiment, including China’s lockdown, the Russia-Ukraine war and US Federal Reserve rate hikes.

“That’s why the impact of the currency has become minimal. Fundamentally speaking, if the currency remains at the current trend, then it will prompt more people to look at this factor as the gains will be reflected in the quarterly financial performance.”

In the case of gloves, Wong says the average selling price (ASP) trend and market demand play a more important role in determining share price performance.

He points out that geographical diversification does help companies navigate currency risk. For example, Genting Bhd could see more gains from its US and Singapore operations on the back of the strong greenback.

Meanwhile, Lee Chung Cheng, head of research at JF Apex Securities, is of the view that exporters may not see much of a rally this time around due to rising costs.

“When you talk about the strengthening of the US dollar, you can bet on exporters like plastic packaging, but at the same time, their costs are also increasing because of resin and crude oil prices. So, you can’t just look at one factor. That’s why you seldom see exporters rally this time.”

Thomas Yong, CEO of Fortress Capital Asset Management agrees, advising investors to take into account other factors such as cost composition.

“Many companies are facing issues of rising wages, supply constraints and logistic congestions. With the global economy slowing down due to high inflation and waning demand, it is not so straightforward to identify and invest in the companies that benefited from the weakening of the ringgit.

“Under normal circumstances, the export-oriented players will get a sentiment boost when the ringgit is weakening. However, we are in a situation of moving out from the pandemic, in addition to heightened geopolitical tension which could disrupt the normal trade flows. In fact, we are seeing countries positioned in different phases of the business cycle. This makes analysis more complicated and the trend of currency movement might not last for a long time.”

He says certain sectors appear to be attractive at the moment, but earnings might not be sustainable in the next one to two years.

“Hence, valuations will just look fair. We have to take into account how long those factors that cause a short-term surge in earnings will last.”

Victor Wan, head of research at Inter-Pacific Securities, still favours technology stocks for overseas sales, but cautions that the exchange rate factor is very dependent on the timing of raw material purchases as well as sales.

Having fallen drastically since the global inoculation drive, the upside in glove stocks looks to be limited, according to Wan, though Top Glove Corp Bhd and Hartalega Holdings Bhd seem to have found some support, trading at forward 12-month PERs of 24.9 times and 4.6 times respectively.

“I think they are possibly at the bottom or close to the bottom, but demand for gloves will be quite subdued going forward,” he says.

While the aviation industry is facing a double whammy of high jet fuel prices and a weaker ringgit, Wan says the fuel surcharge measure will help them offset the impact. As for the consumer sector, players would have to pass on the additional costs arising from higher input prices.

Although a weak currency should boost the competitiveness of exports, Wan is of the view that Malaysian exports do not face direct competition with other Asean countries given the different products being offered. Instead, the main concern is the slowdown in the Chinese economy, which could affect semiconductor output.

“As China is Malaysia’s biggest trading partner, with a lot of intermediate goods coming from there, any slowdown in Shenzhen’s activity could have an impact on our manufacturing and exports,” he explains.

With Bank Negara Malaysia slated to raise the interest rate this quarter, Wan thinks it should provide some cushion to the ringgit. “Broader inflation is something Bank Negara will be very concerned about. The actual rate is certainly more than 2.2% as reported,” he says.

Meanwhile, Rakuten Trade head of research Kenny Yee points out that the competitiveness of manufacturers may not be as pronounced this time around owing to constraints in supply chains.

“In addition, most manufacturers possibly have an agreement with their buyers — if there is any movement in the currency, they can readjust accordingly. Of course, it is not 100% but at least a portion of it to minimise the impact.”

Analysts opine that the weakness in the ringgit, alongside the regional currencies, is highly correlated to the US Fed’s hawkish stance, worrying US inflation data and the Russia-Ukraine war. Domestically, the sentiment has been beleaguered by high subsidies and a budget deficit.

As the weakening of the renminbi and yen have had some impact on the ringgit given that both China and Japan are Malaysia’s major trading partners, Wong says he wouldn’t be surprised if the ringgit skids past the 4.40 level in the short term but he doesn’t think it will last long.

Despite the US Fed’s hawkish stance, it can’t act too aggressively due to recession fears. Similarly, on the local front, Bank Negara is not expected to be very aggressive in tightening monetary policy, says Wong.

He believes the ringgit will not be severely affected by external issues as Malaysia’s economy is not solely dependent on exports.

“Our trade continues to be in surplus, and our forex reserves are about more than US$100 billion. All these factors will prevent the ringgit from weakening further, unless the budget is out of control or rising inflationary pressures.

“I would think there will be a point where we are attractive enough to attract investors again, given the weak currency and undemanding share price levels following the recent retracement,” he says, adding that the reopening of borders will be a big catalyst.

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