Equity market could get caught in range-bound mode

PETALING JAYA: While prevailing uncertainties such as the US interest rate direction, oil price movement and goods and services tax (GST) implementation will continue to overshadow market sentiment, the upcoming 11th Malaysia Plan (11MP) and Invest Malaysia (IM) conference might give the local market a boost.

Kenanga Research analyst Chan Ken Yew, who has a “neutral” call on the second quarter, said the supportive domestic excess liquidity condition and improving investor sentiment should limit the market downside.

He said that the market saying “sell in May and go away” may not be applicable, at least from the FBM KLCI’s perspective, noting that he had seen no significant decline in both monthly total returns for the months of May and June since 2009.

“In fact, the second quarter has been contributing 12.4% to the full-year total return, on the average. Having said that, the less attractive valuation of FBM KLCI could potentially cap the upside as well. Hence, we reckon that the local equity market could be trapped in a wide range-bound mode until we see more exciting catalysts,” he said in a recent report.

Kenanga Research’s end-2015 index target is pegged at 1,855 (versus consensus target of 1,860), implying around 20 times and 19 times price/earnings ratio to its financial year 2015 and 2016 earnings estimates.

Chan said that any positive news flow from the 11MP, which will be tabled by Prime Minister Datuk Seri Najib Tun Razak in May, with regard to MRT2 and LRT3 would benefit companies such as GAMUDA BHD and MMC CORPORATION BHD.

“Additionally, we believe that the reconstruction of infrastructure coupled with flood mitigation programmes after the recent floods may benefit small and mid-cap contractors, namely MUHIBBAH ENGINEERING (M) BHD, MALAYSIAN RESOURCES CORPoration Bhd and Mitrajaya Holdings Bhd.

As for the IM conference, Chan said that anticipation of higher foreign inflow would also likely to be supportive of the market, adding that he did not rule out Government leveraging on the 11MP to announce some market friendly policies.

He said domestic liquidity remained ample, noting that while the market saw heavy foreign equity (RM3.7bil) and debt (RM23.4bil) outflow, the excess liquidity position increased by RM19bil to RM301.9bil as at end Dec 2014.

“This scenario has definitely illustrated the ability of the market to withstand external shocks,” he said.

However, Chan said they had underestimated the impact of the GST in business operations, adding that there had been a few retail players reporting weaker-than-expected operations as a result of inventory writedown and deeper price discounts.

Going forward, he said most manufacturers, suppliers and retailers had less incentive to lengthen credit terms or were even less keen on doing credit sales as the cost of business was higher with advance cash flow due to the GST payment.

Meanwhile, MIDF Research analyst Syed Muhammed Kifni said that trend-wise, market valuations were gradually moderating, with the downward momentum of FBM KLCI price/earnings ratio towards its long-term mean remaining intact.

However, he said the mean reverting process could take a couple of years to complete, with possible PER oscillations in between.

“However, as we expect the 2015 earnings revisions going forward to be generally flat or even upward biased, the resultant PER valuation of our 2015 year-end target may turn out to be lower than 17.3 times,” he said.


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