2 days ago
Tariff uncertainty clouds rate cut gains as Malaysia eyes global trade risks
BANK Negara's latest overnight policy rate (OPR) cut was a pre-emptive one, not based on existing weakness in data points.
But Kenanga thinks cues from past patterns on how sectors would trade subsequently can still serve as a good reference point.
Historically, post a domestic rate cut, the 12-month return typically shows that the FBM KLCI's 12-month index returns post a rate cut were in the positive 3 out of 4 occasions since 2009.
'Among these, the financial sector has historically fared better with the exception of the May 2019 OPR cut, if we exclude the technology sector which is exposed to global supply chain factors,' said Kenanga.
This is expressed in relative terms to the FBM KLCI performance. On a 12-month basis, historically, the utilities sector performed less well after the onset of a rate cut.
Kenanga Economists sees that there will be no more rate cut for the rest of the year, unless GDP growth drops below 3.5% or if external conditions worsen, then BNM may have room to ease further.
Nevertheless, we have flagged a mild bull-steepening bias. This terminology describes a scenario where short-term bond yields fall faster than longer-term bond yields as investors typically favour shorter-term investments, which may be brought about by expectation of additional rate cuts.
Utilities tend to outperform in such a phase, and quarter three calendar year 2025 (3QCY25) would likely offer such tactical playbook.
This is amid the complexity of US tariff discussions ahead of the 1 August effective implementation date, where Malaysia via its Investment, Trade, and Industry Minister has said that Malaysia is taking a measured approach to tariff negotiations, being mindful of broader implications.
On the other hand, Kenanga also saw very little evidence of a rate cut being correlating well with improved stock returns in the consumer sector.
Specific for consumer, we watch for the fact that higher disposable income from the OPR cut may be offset by the inflation cost-pass-through from businesses to the consumer.
We observe that the 25 bps rate cut is not expected to move the needle for the sectors under coverage in terms of interest savings, as these hover less than 2% to earnings.
We foresee some savings accruing to Utilities and Telco names, but expect to see opposite effect ringing true for the Oil and Gas sector as the players are generally in net cash position; some of them have employed hedging strategies, true for the likes of MISC and YINSON.
Banking sector already reflecting pandemic level of loan growth expectation in ROEs and is fundamentally at a bargain level.
The key for us is a strong GIL ratios for banks of <1.5%, which when coupled with the effect of a rate cut, could alleviate the need to top up on provisions.
We believe investors will look to find more comfort in the area of growth. In this regard, banking analyst Clement Chua in his 10 July Sector Update estimated that all else equal, share-prices implied ROEs would commensurate with a loan growth for the system of 3.4% – which was essentially levels seen during Covid-19 (2020).
This thus gives us confidence that the banks are undervalued. In the very immediate term, should bull-steepening bias materialize, historically it would be an uphill task for banks to outperform during such a stretch.
Risk to the REIT sector earnings growth would be from the implementation of service tax, although a rate cut without GDP growth cut would likely be positive for the sector.
As analysed in our latest REIT sector report (dated 10 July), the implied yield at the current moment at c.3.5% (MGS). This compares to 3.44% at time of writing.
Our Kenanga forecast is for the year-end MGS to hover around similar levels and thus while the sector has momentum, we believe that fundamentally, the upside is more limited.
Where we may be wrong is if more OPR cuts are deemed necessary – our coverage companies display a yield of 5.3% currently, and in the past decade we have seen the REIT sector trade at a level commensurating with yield of 4.6% during the pandemic. —July 14, 2025
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