Promising outlook for Malaysia's equity market next year

  • Business
  • Wednesday, 16 Dec 2015

PETALING JAYA: The outlook for Malaysia’s equity market next year seems promising, with two local brokerages expecting the benchmark FBM KL Composite Index (FBM KLCI) to hit at least 1,800 points by the end of 2016.

In their respective reports yesterday, CIMB Research said it was optimistic that the numerous domestic and external headwinds plaguing the country’s stock market in 2015 would make way for a more promising environment next year, while MIDF Research stated that 2016 could see a resumption of corporate earnings upcycle.

On that note, CIMB Research upgraded its end-2016 FBM KLCI target to 1,900 points from 1,850 points previously based on a higher price-earnings ratio (PER) of 16.5 times, compared with 15.5 times previously.

MIDF Research, on the other hand, maintained its end-2016 FBM KLCI target at 1,800 points, which was based on PER of 16.34 times.

“Although Malaysia still faces numerous headwinds in the coming year including slower economic growth and an uncertain external environment, we believe much of the bad news should have been priced in already,” CIMB Research head Terence Wong said.

“Foreign shareholding is relatively low and most foreign funds are very underweighted in Malaysia; the negative impact of GST (goods and services tax) on consumption should start to wane and companies that benefit from a weaker ringgit, including exporters, tourism and those with overseas earnings, could enjoy a windfall,” Wong added.

While CIMB Research’s end-2016 FBM KLCI at 1,900 points represented a 5% premium to the three-year moving average of the benchmark index, the brokerage said the slight premium was justified as most of the bad news had been priced in, there could be catalysts that could lift the market higher next year.

According to CIMB Research, these catalysts would include waning domestic political noise; subsiding foreign selling; waning GST impact on domestic consumption; weak ringgit that benefits certain sectors and companies; the flood of China money and investments into Malaysia; and ValueCap buffer.

Meanwhile, MIDF Research said the anticipated earnings growth recovery in 2016 would be a major catalyst for Malaysia’s equity market.

Referring to Bloomberg’s poll of analysts, MIDF Research said: “The consensus 2016 FBM KLCI earnings growth is estimated to return to a healthy, and more normal, level of 9.1%. The anticipated forward-year performance is in stark contrast to the prevailing ‘earnings recession’ as attested by current year earnings growth estimate of -6.6% as well 2014 and 2013 growth figures of 1.9% and -5.1%, respectively.”

MIDF Research’s own estimate of 2016 earnings growth for the FBM KLCI 30 stood at 8.6%.

“Earnings growth is expected to improve going forward in line with bottoming commodity prices and coupled with the still healthy macro growth outlook,” it explained.

MIDF Research said Malaysia could be one of the beneficiaries should global money return to emerging markets, whose currencies and equity prices had been in the doldrums for a prolonged period, in a big way in 2016.

MIDF Research said the sectors on which it was positive for 2016 were aviation, construction, glove, healthcare, insurance, plantation, port, shipping, technology, power and oil and gas.

As for CIMB Research, its top sector picks for 2016 would be banking on the back of attractive valuations; construction on the roll out of large mega projects; as well as small-cap stocks.

Its top three big-cap stocks would be RHB Capital Bhd, Gamuda Bhd and Tenaga Nasional Bhd, while its top three small-cap stocks would be MyEG Services Bhd, Prestariang Bhd and Only World Group Holdings Bhd.

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