Positive outlook for local equity markets

KUALA LUMPUR: Interest in the local equity market will likely continue as a combination of structural changes at the macroeconomic level, renewed business and consumer confidence, large-scale initial public offers and companies' regional diversification boost earnings.

Deutsche Bank's Asean/Malaysia equity research head Teoh Su-Yin said at a media briefing yesterday that despite the usual view of Malaysia being a defensive slow-growth market, changes at the macro level over the last few years had spurred interest in the country's equity market, which was the second-best performer in US dollar terms after Thailand in 2010.

She said the house had a target of 1,790 for the benchmark FBM KLCI by year-end while inflation was expected to be moderate at 2% to 3% with the possibility of up to 50 basis points of rate hikes in the benchmark overnight policy rates, which currently stood at 2.75%, in the second half of the year.

Teoh said the recent sell-off in Malaysia and markets in the Asean region was temporary owing to inflationary pressure bringing forward possible rate hikes while relatively positive data from the United States usually favoured the North Asian markets.

She said investors were also currently in a profit-taking mood as the markets had performed well last year from funds attracted to the region following the dimmer outlook in the developed markets.

“We may not see equity markets perform as strongly this year but we expect the recent jitters to subside as structurally Asean remains a growth story,” Teoh added.

She said plantation stocks, companies which had diversified into the region, property stocks and companies in the oil and gas industry were the house's picks this year.

The view of Malaysia as a “dull” market was increasingly redundant as local companies' diversification in the last five years had resulted in one-third of their earnings coming from abroad, she said.

“Malaysia gives investors the Asean footprint,” she said, citing bank, plantation and telecommunication companies' diversification over recent years.

The macroeconomic reforms taking place had also helped in spurring interest in the market and the spate of merger and acquisition activity from late last year was expected to continue this year, she said.

“The subsidy cuts have been a brave move from a political standpoint and has been done gently enough that consumers have not felt it.”

Teoh said the positive impact from the RM11.2bil in new contracts (which excluded the mass rapid transit project) awarded in the construction sector last year for both local and overseas firms would flow into this and next year.

She said commodity prices, which contributed to plantation companies' earnings last year, would continue to have a positive impact this year while local banks with stakes in Indonesian banks would also continue to see growth translated into earnings.

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