PETALING JAYA: It is not impossible for Malaysia’s benchmark index to bounce back to the 1,600-point psychological level within the next six months, according to analysts.
While FBM KLCI has declined to 1,451.48 points as of yesterday, analysts said an improvement in market sentiment amid a continued recovery in the economy would help Malaysian stocks to stage a rebound.
Hong Leong Investment Bank (HLIB) Research expects the FBM KLCI to hit 1,610 points by end-2022.
To achieve this, the index needs to jump by over 158 points or almost 11% from yesterday’s closing level in the second half of 2022.
“While we acknowledge strong headwinds are blowing from a possible United States “hard landing” into a recession, we feel that current battered valuations on the local bourse offers some solace for nibbling – forward price-to-earnings ratio and trailing price-to-book value ratio have hit a five-year low (excluding the initial Covid-19 crash in March 2020 for the latter).
“In addition, with a sustained reopening for Malaysia, we believe the country is now on a stronger footing than it was during the 2020-2021 Covid-19 pandemic which was marred by the unpredictability of lockdowns.
“Rating agency S&P’s recent revision of Malaysia’s long term sovereign credit outlook from ‘negative’ to ‘stable’ is testament to this view,” it said in a note yesterday.
Vincent Lau, head of equity sales of Rakuten Trade, told StarBiz that the research house projected FBM KLCI to reach 1,630 points by end-2022.
“We have not revised the target so far.
“It is possible for the benchmark index to bounce back, on the back of the second and third-quarter result seasons that should do better,” he said.
Lau said that the country’s economic reopening is expected to spur corporate earnings growth, which should help improve market sentiment that is currently dampened by fear of potential recession.
“Valuations of many stocks are fairly cheap compared to previous years. This creates opportunities for investors to buy securities at a more attractive price.
“In addition, some of the cash from the withdrawals from the Employees Provident Fund could be invested into equities. So, this should help support sentiment as well,” he said.
While analysts have a rather positive outlook on the stock market, the equities universe would have to navigate through challenges.
HLIB Research noted that market headwinds remain aplenty.
Nevertheless, it said Malaysia’s economic recovery remained favourable in the first half of 2022. It has also upgraded Malaysia’s gross domestic product forecast for 2022 to 5.9%.
“We won’t deny, there isn’t a shortage of market-spooking headwinds – however, it is imperative to delve beyond the headlines.
“Despite the onslaught of war and China’s lockdowns in the first quarter of 2022, supply chain disruption indicators (though elevated), haven’t worsened, with some in fact easing, suggesting these woes are past the peak.
“While still tough to imagine how (or when) the Russia-Ukraine conflict will end, Malaysia (and Asean) remains relatively more insulated from this compared to the developed West,” the research house said.
On the global race to hike interest rates to tame inflation, HLIB Research said the market could likely stomach higher rates.
It pointed out that the last notable overnight policy rate upcycle in Malaysia happened in 2010, where rates were raised from 2.00% to 2.75%.
“Despite the rate upcycle, the FBM KLCI gained 19.3% that year, spearheaded by the index heavyweight banking sector (Bursa Malaysia Financial Services Index: up 25.4%),” it said.
Looking ahead, HLIB Research is bullish on a total of 11 sectors.
It assigned “overweight” ratings on aviation, brewery, gaming, healthcare, media, oil and gas, plantation, banking, technology, utilities and wood manufacturing.
“Our sole ‘underweight’ rating is on gloves as we believe it will still be difficult for them to fully pass on higher costs given competition from China, in addition to the risk of dropping out of the FBM KLCI,” the research house said.
Meanwhile, Rakuten Trade’s Lau said investors should consider stocks in the recovery-play theme and in the technology sector for the second half of 2022.
“While technology stocks have declined in the past several months, their valuations are more attractive and they should have a strong growth in earnings at least for the one to two years,” he added.