MIDF does not foresee the equity market turning bear anytime soon

  • Markets
  • Thursday, 10 Mar 2016

KUALA LUMPUR: As the outlook for Malaysia's economy remains rather sanguine with Bloomberg consensus GDP growth for this year expected at 4.4%, MIDF does not foresee the equity market turning bear anytime soon.

It said in a note on Thursday that a bear market generally occurred in reaction to drastic deterioration in the macro economic performance, as witnessed during the 1998 crisis and 2008 economic downturn. 

That said, it remains mindful of intermittent cyclical pullbacks that may take place due to varied situational issues, even amid continued healthy macro growth. 

“It is notable that FBM KLCI price trajectory since 2013 mimicked the underlying flat to negative earnings performance. On that score, the anticipated earnings growth recovery in 2016/2017 may also see the benchmark similarly escaping the recent ‘price recession’.

“Therefore, premised on the rooted behavior whereby earnings and price are trending broadly hand-in-hand, we reiterate our 2016 FBM KLCI target at 1,800 points,” it said. 

According to Bloomberg consensus, 2016 FBM KLCI earnings growth is expected to return to a healthy level of 10% due to the low-base effect from general earnings underperformance in 2015. 

This is in contrast to the recent ‘earnings recession’ in 2015 earnings growth of -12.1% as well as 2014 and 2013 growth figures of 1.9% and -5.0% respectively.

“Furthermore, we foresee a reduced risk of material downward revisions in forward earnings estimates due to the already lowered expectation hurdles (with key revenue and cost drivers as well as other assumptions pegged at quite pessimistic levels) pursuant to six consecutive quarters of earnings disappointment up until 2Q15,” it said. 

It added that the two most recent results quarters to 4Q15 have produced aggregate results which met its expectations.  

MIDF’s assessment is that the likely longer-term trend path of the FBM KLCI is highly dependent on the expected earnings growth performance during the similar tenure. 

For the short-term, empirical evidence suggests that foreigners tended to sell on rumor, but turned buyer/neutral on fact. As the actual rate liftoff took place in mid-December last year, a repeat of past behavior should result in a fairly supported equity market during at least the first half of 2016. 

The equity market began the year in a jittery mode due to the further slump in crude oil prices to below US$30 per barrel. 

But, the FBM KLCI made only a shallow retreat with good support seen at between 1,600 to 1,630 points and subsequently staged a gradual rebound and revisited the 1,700 points levels earlier this week.  

The gradual rebound in local equity prices coincided with the general returning of net inflow of foreign liquidity since the final week of January this year, This also corresponded with the improvement in crude oil prices as well as the relative strengthening of ringgit against US dollar.

“Technically, the market barometer is turning bullish as it broke above the 200-day moving average last week. However, it is notable that a breakout price momentum would normally retest the breakout line as it encounters profit taking activities before the next northward push. Hence we could be looking at the market undergoing consolidation in the interim period with a prevailing resistance-turned-support level at ~1,675 points,” said MIDF.  

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