KUALA LUMPUR: The local bourse’s underlying momentum is strong with factors such as the upcoming general election and strengthening ringgit aiding the bullish trend, said Affin Hwang Capital managing director Teng Chee Wai.
He pointed out that the strengthening ringgit has helped funds flow back into the stock market while positive trading sentiment in US equity markets such as the Dow Jones Industrial Average (DJIA) has also helped.
But there continues to be a lack of earnings visibility for export-oriented companies on the benchmark KLCI which have less representation.
“We have a downward earnings revision and this is what’s holding the index.
“Despite a decent gross domestic product growth, our earnings revision is still weak, this reflects the index which is very much domestically focused and less export driven.
“If you look at the recovery in 2017 and now, the export sector is doing very well,” Teng said.
“But yet when you look at the export-related stocks on the exchange, the weights are very low. What dominates the Malaysian market are the banks, plantation and at one stage it was the oil and gas sector, telecommunications and utilities – these dominate the index. So this influences the earnings profile of the index,” he added.
He said plantation, as well as oil and gas stocks, also have earnings issues due to the reliance on commodity prices and overcapacity, respectively.
He did not have a target for the FBM KLCI index, noting that most of these targets were not usually practical.
“The key to the market performance moving forward will be earnings revision,” he said.
On stock picks for Malaysia, Teng preferred banks such as Malayan Banking Bhd and CIMB Group Holdings Bhd , and Sime Darby Bhd . “We have a huge position on Sime Darby and we think the valuations are still cheap here while the street’s forecast price projections are even much higher.
“Other themes include some in the manufacturing space such as Scientex Bhd . But bear in mind every stock has its own inherent risks as well,” he said.
Teng said the market as a whole also faced risks from overseas, particularly the DJIA, and that if there was a blip there then the effects could easily reverberate throughout the world stock markets.
Teng expects the ringgit to continue appreciating and it may soon test the 3.80 level against the US dollar. “The ringgit has been punished too much since 2015.
“If you look at the decline in the ringgit against even all other commodity related currencies – we have seen the ringgit being punished for whatever reasons that is out there.
“Other currencies such as the Brazilian real or even the ruble: there has also been a sell-off at the same time but they have all recovered meaningfully already but not the ringgit,” Teng said. “November 2016 marked the bottom for the ringgit when Bank Negara introduced a policy to encourage exporters to repatriate 75% of their proceeds back to the ringgit. If you look at our country’s fundamentals, there is no reason why the ringgit should be at those levels: RM4.40-RM4.50 to the US dollar. The fair value at this point in my (view) is at RM3.80-RM3.90,” he added.
Teng said economic fundamentals would tell if the ringgit can break through and strengthen beyond the psychological 3.80 level.