Widely expected US rate cut to boost large-cap banks, energy stocks, REITs — Kenanga

• Rate cuts in the US have been mostly positive for the FBM KLCI with a median return of 8% over a 12-month period after a US rate cut, Kenanga said in a note.

KUALA LUMPUR (Sept 18): A widely expected US policy rate cut this week will boost Malaysian stocks in the oil and gas (O&G), real estate investment trust (REIT), and large-cap banking sectors, Kenanga Investment Bank said.

Rate cuts in the US have been mostly positive for the FBM KLCI with a median return of 8% over a 12-month period after a US rate cut, Kenanga said in a note. The index produced negative returns over a 12-month horizon only on three occasions out of the past 10 rate cuts, the research house noted.

“As all eyes this week will be on the US at the cusp of a rate decision, sentiment on broader equities will hinge not only on the extent of cut but more so on the US Federal Reserve’s (Fed) outlook,” Kenanga said.

The Fed is expected to announce its first policy rate cut for more than four years on Wednesday though analysts are still split on the size of the reduction as inflation eased and employment market cooled.

The FBM KLCI has gained more than 14% so far this year, largely driven by strong gains of banking stocks. Institutional investors, particularly foreign fund managers, have also been buying Malaysian stocks following strong economic data and recent upgrades by JPMorgan and Goldman Sachs.

Unlike other central banks, Bank Negara Malaysia is expected to stand pat, and the steady rate environment would bode well for banking stocks, said Kenanga. However, “foreign funds are less likely to be induced into buying smaller caps banks”, the research house said.

A US rate cut could also lead to greater focus on the capital-intensive O&G sector as operating conditions could ease and global demand recovers after “some lag” as well as boost oil prices, Kenanga flagged.

REITs, meanwhile, are an attractive alternative to bonds amid declining yield on Malaysian Government Securities, and there is still room for yields to fall to “around 3.6%” by year end, the research house said.

“Similar interest in the government bonds space may push down bond yields sufficiently for the REIT sector to begin to re-rate as well from yield spread differentials,” Kenanga added.

Kenanga picked Dayang Enterprise Holdings Bhd (KL:DAYANG), Wasco Bhd (KL:WASCO) and Dialog Group Bhd (KL:DIALOG) for O&G, Public Bank Bhd (KL:PBBANK) for banking, and Sunway REIT (KL:SUNREIT) and Pavilion REIT (KL:PAVREIT) for REITs.

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