PETALING JAYA: A consumption recovery will drive Malaysian equity returns and outperformance, said Nomura in a recent Malaysia strategy report.
It said various indicators such as consumer confidence, retail sales, low- to mid-end automobile sales and property loan applications have shown a sustained but fragile rebound, as the two-year drag due to the goods and services tax (GST) starts to dim on suppressed demand.
“A strong macro print and a gradual appreciation of the ringgit will likely sustain foreign inflows into equities, and we raise our KLCI targets by 3% each to 1,800 and 1,860 for end-2017 and 2018,” said Nomura.
The research house added that the three themes for its stock picks were based on early margin turnaround, elections and foreign direct investments (FDI).
According to a sector analysis, Nomura found that sectors showing signs of early margin turnaround include consumer discretionary, information technology, utilities and staples sectors.
Meanwhile, sectors such as financials, healthcare, materials, telcos, and real estate may still see margin weakness ahead.
“We expect the next general election in early 2018, and based on our analysis of the elections in 2013, we expect a similar outperformance in the consumer discretionary and utilities sectors around the election period.
“The real estate sector remains the biggest wildcard with any relaxation likely to re-rate the developers, financials, and large contractors,” said Nomura.
Apart from that, Nomura noted that there were long-term opportunities for contractors, transport or logistics, financials, and consumer sectors, in line with the rising Belt and Road investments.
Nomura said Malaysia remains one of the most attractive destinations for FDI, due to a growing domestic market, reforms focused on improving infrastructure and the ease of doing business, a more open and liberal FDI regime, sound economic management and political stability, as well as the availability of low-cost labour.
The top buy recommendations for Malaysia going into 2018 comprise Public Bank Bhd, CIMB Group Holdings Bhd, Tenaga Nasional Bhd, Sime Darby Bhd, Axiata Group Bhd, Genting Bhd, Genting Malaysia Bhd, Malaysia Airports Holdings Bhd, AirAsia Bhd, Dialog Group Bhd, and Sunway Construction Group Bhd.
Meanwhile, MIDF Research expects recovery in the local retail segment to improve, in the first half of 2018 onwards, as the multiplier effect of better gross domestic product growth translates into better consumer spending power. “The local retail market remains challenging as consumer purchasing power will continue to fall while retail players are facing ever-increasing competition as new local and foreign retailers are flooding into the local market,” said MIDF Research.
Hence, in the meantime, local retailers will need to expand in order to seek untapped markets to sustain earnings.