MIDF Research believes the market is still in the midst of climbing a wall of worry despite the recent tapering of foreign flows.
KUALA LUMPUR: MIDF Research sees more upside for the Malaysian stock market as the economy remains positive following the robust external performance and resilient domestic demand, continuing earnings recovery and further upward revisions in earnings expectations.
In its strategy report, the research house said on a macro level, optimism is rekindled by the consensus-beating output growth in major Asian economies such as China which is evident by its 6.9% on-year GDP growth in 2Q17.
“In addition, the outlook for Malaysia's economy remains sanguine with our in-house GDP growth estimate for this year being revised upward to 5.1% (from 4.9% earlier) supported by robust external performance and resilient domestic demand,” it said.
MIDF Research said against the backdrop of improving macro environment, it foresees restricted downside risks (in terms of earnings and consequently price) to the equity market.
The research house foresees the KLCI regaining its upward thrust in the final trimester of 2017 to be propelled by (i) continuing earnings recovery, (ii) further upward revisions in earnings expectations, and (iii) macro resilience.
“Having said the above, we remain mindful of intermittent cyclical price pullbacks that may take place as a result of transient situational issues amid the ever-present noises surrounding the market.
“We reiterate our year-end 2017 FBM KLCI baseline target of 1,830 which equates to price-to-earnings ratio for FY17 of 16.9 times and +one standard deviation,” it said as it maintained its lower and upper target range of 1,770 and 1,890 respectively.
To recap, foreign investors were net buyers on Bursa Malaysia for 18 straight weeks from Feb 10 to June 9, the longest streak since 1H13.
MIDF Research explained that during this period the KLCI broke above its nearly two-year trading band and moved on to chart an upward trajectory where it almost hit the 1,800 mark on June 16, crested at 1,796.75.
“From being bottom feeders in late last year to bargain hunters earlier this year and on to become momentum players in the last quarter, some investors are presently deemed as premature eradicators as attested by the recent price pullback.
“As geopolitical factors took centre stage, the so called premature eradicators began reducing their exposures in Malaysia equities.
“The tapering of foreign inflows saw the KLCI retreated from its YTD high of 1,796.75 to hover above 1,750 levels currently,” it said.
Amongst the geopolitical “noises” that have affected market sentiment are (i) disputes between Qatar and Arab nations, (ii) the test launch of Intercontinental Ballistic Missile (ICBM) by North Korea, and (iii) Britain’s Prime Minister Theresa May’s failure in securing the parliamentary majority in UK snap election.
“We believe the market is still in the midst of climbing a wall of worry despite the recent tapering of foreign flows.
“On this score, it is important to note that there has been no period of sustained selling so far (only five weeks of attrition in 2017),” it said.
MIDF Research pointed out that at the beginning of 2Q17, the KLCI took a breather as it retraced to the 1,730 levels amid geopolitical risks, i.e. the US Navy headed towards North Korea waters due to concerns over its weapons programme.
As soon as the geopolitical noises faded, the KLCI bounced back up to levels near 1,800.
“Likewise, we deem the current pullback to be temporary as the market fundamental underpinning is still positive.
“Above all, the market earnings recovery since mid-2016 to date has been rather incessant is likely continuing,” said the research house.
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