KUALA LUMPUR: Nomura Global Markets Research has upgraded Malaysian stocks to "Overweight" from "Neutral", on an almost certain US Federal Reserve rate cut cycle which should further ease pressure on the ringgit and stoke a rally in emerging markets.
It said key reasons for its upgrade were the strength of Malaysia's economic growth, artificial intelligence (AI) fuelled investments and appreciating ringgit.
Year-to-date, it said the ringgit has been the best-performing currency in Asia ex-Japan, gaining about five per cent.
Nomura's economics team also expects above-consensus full-year 2024 GDP growth of 5.2 per cent for Malaysia.
It said many themes, such as increasing foreign direct investments commitments aided by supply-chain shifts are underpinning parts of the stock market.
The firm said that supportive domestic liquidity, due to significant allocations by local asset owners to Malaysian stocks, will continue to bolster the market.
It said market internals are positive, with very light foreign investor positioning, rising trading volumes driven by institutional flows rather than retail, resilient and stable index earnings, and reasonable valuations with stocks trading at a forward price-to-earnings ratio of 14.1 times, below the post-2015 average of 15 times.
Additionally, Nomura said the ringgit has appreciated, aided by the broader weakness of the US dollar.
Overall, the firm's foreign exchange (FX) strategy team forecasts continued broad US dollar weakness in the coming months.
"We think this should also aid returns for US dollar-based investors. "Key risk to our view if the AI thematic slows or rolls over, we think, it could also negatively impact some of Malaysia's high-flying AI/data-centre-related names that are part of the index," it added.
Nomura recommends investing in CIMB Group Holdings Bhd, Gamuda Bhd and Pentamaster Corp Bhd.