Still bullish in the second half

Chip boost: Traders working on the floor of the New York Stock Exchange on Thursday. Global economic recovery would drive semiconductor sales for this year, according to World Semiconductor Trade Statistics. — Reuters

Local market has enough legs to continue rally, say analysts

IN the beginning of the year, it was a good time to buy, what with the FBM KLCI having underperformed for three years and outflows at a record high.

The strategy was quite simple really: Buy, alongside the foreign funds that were rushing in and then sell before the second half of the year. By June or July, a crash or big correction may take place, and from there, investors could once again bargain hunt.

Well, the first part of the plan was well executed. The market did rally by some 7% from January to June. That impending crash however, never took place. Investors are still waiting. Over the last three months, the market has been in fact inching upward. There were some corrections, but nothing extremely major.

Over in the US, the Dow Jones Industrial Average powered up, creating new highs. First it breached the psychological 20,000 earlier in the year, and as of Thursday’s close of 21,750, the Dow is a whiff off the 22,000 mark.

As investors continue to wait by the sidelines, that big much-awaited fall has yet to happen. Despite foreign buying having dwindled, Bursa Malaysia appears resilient.

MIDF Research reported that for the week ended Aug 11, the net amount sold off by foreign investors was RM63.1mil, based on transactions in the open market which excluded off market deals.

Rally on: Wong expects the rally to continue should earnings expectations be met.

 

MIDF said foreign investors had only been net sellers for six weeks this year compared to last year’s 27 weeks.

Despite last week’s foreign withdrawal, the cumulative year-to-date inflow was slightly unchanged at RM10.7bil net compared to RM10.8bil net in the preceding week.

In the past two years, foreigners have exited the stock market. In 2015, the net foreign outflow from the equities market was RM19.5bil, while last year it was RM3bil.

Fisher MarketMinder has one advice very apt for investors:

“Whether or not volatility escalates, focus on whether your long-term financial goals require owning stocks. If so, and if the present bull market has life in it yet, as we believe it does, don’t heed warnings stocks are ignoring huge risks. Markets don’t get everything right all the time, but they’re always pricing in probabilities. Trust them on that,” it says.

Corporate earnings to sustain momentum

The slow start of the second half of the year did not deter analysts’ forecast which is expecting the FBM KLCI to trade beyond the 1,800-level this year.

Maybank Investment Bank Research has maintained its FBM KLCI target of 1,820 for end-2017 supported by corporate earnings growth amid external volatility.

“For Malaysia equities, the key positives are the domestic macros, which should remain positive throughout 2017 while corporate earnings growth looks set to resume.

“That said, we stay mindful of the prevailing external policy and geopolitical headwinds, amid an extended period of market calm and low volatility,” the research house said in a recent report.

Year-end mark: Lau says Rakuten Trade research’s year-end target for the FBM KLCI is 1,850 points.

 

Among its top pick sectors for the second half of the year include construction, cement, gaming and utilities.

Interestingly, Maybank IB also suggests the oil and gas (O&G) sector with Sapura Energy Bhd and Yinson Holdings Bhd as its top picks.

In the first half of this year, the rally in the stock market was in line with the growth of corporate earnings and a robust economic outlook.

Corporate earnings in the first quarter saw its fastest growth in two years. The banking and export-related sectors were boosted by the stronger economic growth.

The economy rebounded strongly by 5.6% in the first quarter ended March 31, compared with the same quarter a year ago. While for the second quarter, the economy grew 5.8%, above consensus estimate of 5.4%.

Bank Negara expects 2017 growth to exceed the 4.8% forecast.

Despite the good run in the equities market in the first half of the year, Credit Suisse reckons that Malaysia are among the “huge underperformers” compared to Asia Pacific ex-Japan’s 22% return year to date.

The other underperformers include Thailand, Indonesia and the Philippines.

Better than expected economic growth has boosted the outlook of the ringgit exchange rate against the US dollar.

Standard Chartered and Credit Suisse are targeting the ringgit to improve to RM4.10 a UD dollar in the next few months.

Aside from the construction theme to continue in the second half of this year, analysts say that economic activity in Malaysia during that period will be driven by exports, which will continue to be led by the technology sector.

According to World Semiconductor Trade Statistics (WSTS), global economic recovery would drive semiconductor sales for this year, with Asia Pacific expected to record 12.4% growth.

It expects that the global semiconductor industry is on track for another record-breaking year in 2017, after recording all-time high sales of US$339bil in 2016.

Kenanga Research suggests retail and manufacturing sectors to remain robust supported by consumption growth.

However, it expects that economic growth is likely to taper in the second half dragged by oil prices.

“Despite the rosier outlook in the manufacturing sector, mining sector outlook is likely to be biased on the downside.

“Malaysia’s participation in Opec’s oil production cut along with slower expansion in the natural gas index, suggests that the mining sector will be a drag to growth, shaving off around 0.1 percentage point off headline GDP growth,” MIDF said in a report.

It pointed out that the upside in the manufacturing sector would driven by continued strong growth of the electrical and electronic segment with additional support from the petroleum, chemical, rubber and plastic products” subsector and food processing sub sectors.

Strong exports performance in the first half of the year would have a spillover effect in the second half, according to MIDF Research.

IPI measures the manufacturing, mining and electricity output of the country to provide a glimpse on the country’s economic growth in the coming quarter.

It says that the encouraging trend of industrial production index will be supported by trade activities and steady domestic consumption.

“Due to strong export performances for the first half of 2017 and optimistic business confidences, we believe the upbeat momentum will remain and thus causing positive spill over effects to Malaysia’s industrial production this year,” it says.

Any more upside?

Now, what 2017 has going for itself are the upcoming elections and hence the anticipation of contract awardments, particularly in the rail segment.

Malaysia is poised to spend some RM80bil over the next five years on rail projects alone.

The rollout of the RM9bil Light Rail Transit 3 (LRT3) is expected to start the ball rolling for the second half of this year.

Among the projects in the pipeline are the MRT Sungai Buloh-Serdang-Putrajaya Line Two, LRT3, East Coast Railway, and the Pan Borneo Highway. The MRT Line 2 is expected to come into service in 2022 while LRT3 is targeted to commence operations by Aug 31, 2020.

Nonetheless many fear that the good news are already priced into the stocks, and hence into the market. Afterall at 16.81 times price earnings 2016 earnings, the FBM KLCI isn’t exactly expensive, but it is also above its mean average of some 16 times.

“We have had a good run in the first half. I would rather wait for a significant fall before re-entering the market,” says one observer.

Results wise, the second quarter earnings of companies on Bursa Malaysia are in the midst of being announced.

Areca Capital Bhd CEO Danny Wong says that should earnings expectations be met, then this will be a further catalyst for the rally in Bursa Malaysia to continue after its pause.

“We want to see whether the earnings momentum is sustainable. If yes, then this will be an opportunity to buy more. Its hard to buy cheap now. Yes, the Dow Jones index in the US is very high. Valuations are ahead of earnings, but from their recent earnings report, most of the companies reported earnings that did not disappoint. So I think what we are currently experiencing is a case of global growth driving earnings,” said Wong.

Rakuten Trade research vice-president Vincent Lau says there has been some pullback on small and mid-cap recently.

“However, we are generally positive on the second half of the year. Our year-end FBM KLCI target is 1,850, and this is expected to spill over to smaller cap companies. Furthermore, the upcoming budget in October and looming general election should continue to generate interest in the stock market,” says Lau.

Should the Malaysian results season go as planned, then Wong would be looking at some of the construction stocks.

“The construction sector does better in the second half compared to the first half of the year. This is especially apparent this year when so few contracts were dished out in the first half of the year,” he says.

Another sector Wong likes, is the industrial materials sector particularly those that are export oriented.

A third beneficiary would be the technology sector, that Wong feels still has legs to run on the back of technology increasingly becoming a main theme in other sectors.

For example, Bank Negara is issuing a regulatory sandbox framework that will enable experimentation of fintech solutions in a live setting.

Geopolitical tensions a concern?

Earlier this month, North Korean leader Kim Jong-un vowed to ignite an “enveloping fire” of test missiles near the American island of Guam. This was the first time it had specified a target with so much detail.

US President Donald Trump vowed to retaliate fiercely should North Korean attempt on any more provocations.

Trump’s “fire and fury” statements made worldwide headlines. There was palpable fear that North Korea might really attack.

However shockingly, the Dow Jones Industrial Average and S&P 500 barely corrected. While it did close lower, it was at a very minimal correction. Less than 0.5% for the Dow on Aug 10. In fact, the MSCI World Index retreated only 1.5%.

It certainly wasn’t the aggressive blandness most would expect from threats of missiles and weapons of mass extinction. The US was not alone. Globally markets were also mostly calm and up.

Are markets being too contented in its cocoon of rising growth and low interest rates? Is this a precursor to actually sell and get out before the real damage begins?

“Although we noticed the impact on equities market due to the ongoing geopolitical concern has been small, we need to be mindful of volatility, at least in the near term. Investors should be ready for more uncertainties in the short term. The focus will be on the market multiples rather than the real economy,” says Anthony Dass, research head at AmInvestment Research.

So what happens when the geopolitical tension eases?

The focus will again be on incoming data from major economies and on the language of major central banks. Thus, we believe the second half of 2017 will remain challenging

with room for short-term trading opportunities on safe haven assets, especially when uncertainty grows.

If the situation improves, investors could be looking at companies with “value”, and beneficiary of cyclical upturn and earnings momentum as well as growth stories.

Fisher MarketMinder is of the view that the geopolitical tensions are nothing to worry about.

“In our view, markets are doing what they always do – pricing in all publicly available information, including risks, and weighing probabilities. While stocks can behave irrationally in the very short term, presuming they’re wrong about something is fraught with peril,” says Fisher MarketMinder.

It believes that short-term market movement can happen for any or no reason.

Trying to assign inherent expected volatility to current events will do nothing but give investors a headache.

Fisher MarketMinder gives a good example.

It says that if anyone is aware of the risks of nuclear conflict, it is investors on North Korea’s doorstep.

“If any companies are particularly vulnerable to Kim Jong-un’s whims, it is South Korean firms headquartered in Seoul, which is under perpetual threat. But South Korean stocks are up 32% year to date,”

So, South Korean investors aren’t ignoring the dictator next door. Instead, they view Kim’s bombast as a buying opportunity.

North Korean geopolitical risks is nothing new. Their provocations have been happening over the years. So when another one of their threats comes up, it is actually a good time to buy at a lower level.

Thus, markets are simply doing what they do best – efficiently discounting widely known information.

“If information is public, and especially if it’s plastered on every newspaper and cable news banner – stocks rapidly price it in. Markets weigh what’s probable, not what’s merely possible. While hotspots like North Korea spark big fears, huge conflicts remain wildly improbable,”

Fisher MarketMinder says that investors can apply the same logic to the rest of today’s list of allegedly overlooked risks, like an ECB taper, Brexit, the debt ceiling and others.

With so much media coverage, investors are definitely aware of thes issues and their apparent impact.

“Markets reflect the wisdom, opinions and predictions of all investors. That is more brainpower collectively than any supercomputer can muster. Markets are telling us, based on all available information, that these aren’t the bogeymen headlines make them out to be,” says FisherMarketminder.