Thursday, September 23, 2010

Stronger Ringgit means what ?

KUALA LUMPUR: The appreciation of the ringgit to a fresh multi-year high has not gone unnoticed in recent days as investors snapped up emerging market, including Malaysian, assets across Asia.

This is in anticipation that regional economies would exhibit stronger economic growth compared to advanced economies in the US and Europe.

Against the current landscape, one may ask which sector or companies are deemed beneficiaries or losers amid a firmer ringgit ?

According to analysts, beneficiaries of a stronger ringgit include the plantation, automotive, consumer and airline industries.

Meanwhile, losers include glove makers although these companies can, to some extent, pass down their costs, besides oil and gas entities which have contracts denominated in US dollars, and semiconductor players.

Local companies worth noting include power sector players Tenaga Nasional Bhd and YTL Power International Bhd.

It is not unusual for Tenaga to be among the top in the list of winners due to its sizeable foreign debt. YTL Power is deemed to be less affected because although it has dollar loans, it also has revenue denominated in sterling.

A stronger ringgit essentially means companies’ US dollar debt will be less in local currency terms. But export-based firms whose transactions are mainly done in US dollars will also see their income shrink when converted into ringgit.

Meanwhile, plantation entities are expected to gain from a reduction in fertiliser costs, which are denominated in the US dollar. However, as palm oil is transacted in US dollars, a strengthening ringgit does not bode well for plantation companies as their US dollar-denominated income will be less in ringgit terms.

It is worth noting that investors are hedging the risks of a weak US dollar by investing in commodities. Since 2005, the movement of the US dollar has had an inverse 90% correlation to palm oil prices.

Among automotive firms, UMW Holdings Bhd and Tan Chong Motor Holdings Bhd are deemed winners as their costs are primarily in US dollar terms as opposed to Proton Holdings Bhd and MBM Resources Bhd which pay in yen.

Airlines in general will benefit from a stronger ringgit because jet fuel expenses which are priced in US dollars will be cheaper in ringgit terms.

Fuel constitutes a substantial portion of airlines’ cost structure, making up 31% and 45% of Malaysian Airline System Bhd’s and AirAsia Bhd’s operational expenditure, respectively.

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