PETALING JAYA: Bottom-fishing opportunities have emerged in the equity market, with oversold stocks seen as one of the few silver linings for local investors this year.
Pundits recommended investors to focus on stocks that were sold down heavily last year amid the macroeconomic risks and market volatility that showed no immediate sign of waning.
According to AllianceDBS Research, oversold stocks offer “value amid market sell down”.
Meanwhile, Kenanga Research also believed that equities that saw sharp correction in 2018 offer attractive upside potential.
“Apart from filtering out stocks that exhibit attractive upside, we have further short-listed stocks that could potentially see rerating catalysts, and preferably in the immediate term,” the research house said in a note.
AllianceDBS Research pointed out that trading opportunities in 2019 were not limited to oversold stocks.
It said that investors could also consider situational plays such as the beneficiaries of new government policies and US-China trade war as well as stocks whose earnings are resilient.
Apart from that, equities that will be involved in merger and acquisition exercises also offer good opportunities for investors.
On its market outlook for the year, Kenanga Research said it was not bearish on the stock market, although it also pointed out that it was not “outright bullish”.
It predicted the earnings of the 30 FBM KLCI stocks to grow stronger by 6.9% in the financial year of 2019 as compared to an estimated 0.7% growth last year.
“Nonetheless, we believe the local market may still remain stuck in a range-bound mode until significant re-rating catalysts are seen. While the downside could be cushioned, upside is uninspiring with our end-2019 FBM KLCI target pegged at 1,775 points,” it said.
Kenanga Research added that the local equity market would likely do well in the first quarter of 2019 as the first and fourth quarters are normally the stronger period.
“Coupled with the strong sell-downs of late, we reckon that weak hands could have left the market and therefore the market could turn more supportive going forth,” said the research house.
AllianceDBS Research was cautious on the broader market outlook. It was also wary of the risks to growth if the US-China trade war intensifies.
However, the research firm sees the emergence of stock-specific opportunities.
“Our end-2019 FBM KLCI target remains at 1,800 points based on 16 times blended 2019/20 earnings. In a bear case scenario with further deterioration in trade tensions and growth expectations, the FBM KLCI could hit 1,500 points, assuming zero earnings growth in 2019,” it said.
Last year, the FBM KLCI lost 7%, within the range of other stock exchanges in the Asean region. However, the benchmark index’s weakness understated the degree of losses felt by the broader market.
Commenting on the outlook of overall corporate earnings this year, AllianceDBS Research foresees an increase in potential downside to earnings.
“Although asset quality for banks is expected to remain stable in 2019, longer-than-expected weakness in the economic environment may result in higher credit costs for the banks as a result of MFRS9 provisioning. The non-retail segment may also be affected by shifts in the global economy, though the banks’ exposure to risky sectors such as oil and gas is now lower year-on-year.
“For the telecommunication sector as a whole, there could be potential earnings cuts stemming from higher spectrum fee payments for the 700MHz and 2600MHz bands, both that are yet to be determined by the Malaysian Communications and Multimedia Commission.
“For plantations, our forecast for crude palm oil (CPO) stands at RM2,560 per tonne for 2019. Continued increases in inventory, weak exports to India and China, and low crude oil prices would be a potential trigger for us to cut our CPO forecasts,” it said.
Narrowing down on the FBM KLCI, AllianceDBS Research projected the 30 component stock index to record an earnings growth of 4.6% this year, largely supported by banks and telecommunication players.
In comparison, FBM KLCI’s earnings growth for last year was predicted lower by the research house at 2.8%.