KUALA LUMPUR: The prospects of an end to US quantitative easing and China's rebalancing are reasons to expect a more volatile market environment in the period ahead, RHB Research said.
The QE tapering, however, reflects an improving US outlook which suggests the equity market will bounce back and trend higher.
"We are maintaining our end-2013 FBM KLCI target unchanged at 1,815 as equity still stands up against alternative asset classes in an improving economic and earnings environment," it said on Tuesday.
RHB Research pointed that the winding down of QE was now a question of "when" and "not if", likely beginning in December, with investors likely to exit markets earlier. The bond markets may take a longer period to adjust to a higher-yield environment, while equity markets in the emerging markets are expected to be affected by the reversal of short-term capital with foreign investors moving back funds to developed markets.
Whether equity markets in the emerging markets will recover depends largely on the outlook of the global economy, it said.
"We are cautiously optimistic as the underlying fundamentals of the US economy are improving. Once the impact of the sequester fades, the strength of the housing market and the manufacturing renaissance from the shale gas revolution will likely provide catalysts for the economy to trend higher.
"More importantly, we believe the US Federal Reserve will not reduce asset purchases unless it is confident that the economy is strong enough to withstand such a move," it added.
On the Malaysian front, economic growth will not be at risk as long as external demand for its exports remains stable. The country is experiencing a revitalisation of investment, which, coupled with resilient consumer spending, suggests that real GDP will likely pick up to 5.4% in 2014, from +5.1% estimated for 2013, once external demand for the country's exports begins to trend up.
It projected normalised net EPS (earnings per share) for the FBM KLCI benchmark, picking up to 6.9% in 2014, from +5.4% estimated for 2013.
"Given a brighter economic and earnings outlook, we are maintaining our end-2013 FBM KLCI target unchanged at 1,815. This is despite a stormier outlook, as equity still stands up against alternative asset classes for portfolio investors," it explained.
Stocks with strong fundamentals should deliver good share price performance for investors over the longer term. In the interim, investors are advised to trim stocks with rich valuations and undertake portfolio rebalancing.
"As the economy will likely gradually trend up in the period ahead, there are more values in high beta growth sectors. While more values could be found in the mid to smaller-cap stocks, investors should not ignore bigger-cap stocks that have corrected to attractive valuation levels. Sector-wise, our key overweights are banks, construction and oil & gas," said RHB Research.
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