AFTER a rocky first half, investors now find themselves hoping that the second half will see Malaysian equities play catch-up to their regional peers.
But in a world with rising uncertainties due to various economic challenges, no one can say for sure whether that will happen. Some brokerages appear hopeful that shares on Bursa Malaysia will perform better in the second half, citing improving domestic fundamentals, but there are also a number who remain cautious, citing, among other things, unabated external risks.
Take the US-China trade dispute.
While a truce between the world’s two biggest economies has been made at the recently concluded G20 summit in Osaka, Japan, and resulted in a rally across risky assets, many strategists see that as merely a temporarily relief.
This is because the core issues surrounding the trade war such as intellectual property rights and technology transfer have yet to be resolved. And this indicates there is still a risk of further escalation of the trade war, which could be damaging to global growth.
Some are concerned that the recent development could be a repeat of what happened following the G20 summit in Buenos Aires, Argentina, last December, whereby both the US and China announced a 90-day truce, but only to have their trade tensions escalated in May this year.
Underperformer in first half
Weighed down by external headwinds and domestic factors, the Malaysian market was the worst-performer in the first half of this year.
The benchmark FBM KLCI registered a decline of 1.1% from the start of the year to close at 1,672.13 points on June 28.
As of Thursday, the benchmark index had risen to 1,687.48 in the first week of trading for the second half of 2019.
It is noted Malaysia was the only market in the region to close in the red, while the rest posted gains during the first half of the year, with China’s Shanghai Composite Stock Index being the best performer, with a gain of 19.5%, followed by the Thailand Stock Exchange Index (10.6%), Hong Kong’s Hang Seng Index (10.4%) and Taiwan Capitalisation Weighted Stock Index (10.3%).
The decline in FBM KLCI in the first half of 2019 was attributable to foreign selling amid a confluence of negative external and domestic factors. These included the rising US-China trade tensions; FTSE Russell putting Malaysia on the watch list for potential exclusion from the World Government Bond Index (WGBI); as well as concerns over the country’s financial position, political instability and policy uncertainty under the Pakatan Harapan-led government, and disappointing corporate earnings.
On a positive note, the underperformance of shares on Bursa Malaysia vis-à-vis its regional peers could well turn the local equity market into a potential catch-up play, according to some strategists.
AmInvestment Bank Research, for one, argues the FBM KLCI has become inexpensive from a historical standpoint, following the market’s poor performance in the first half of the year.
It estimated the FBM KLCI to be currently trading at 18 times and 16.6 times its projected earnings for 2019 and 2020, respectively, at a discount to the benchmark index’s five-year historical average of 18 times forward earnings.
In its recent strategy report, AmInvestment Bank Research points out that the inexpensive valuations of the benchmark index could be one of the near-term catalysts to the local equity market.
It expects the FBM KLCI to end the year at 1,820 points, based on 19 times 2019 earnings and 18 times 2020 earnings.
Besides inexpensive valuations from a historical standpoint, AmInvestment Bank Research says, other near-term catalysts to the local equity market could potentially come from the easing cycle in the United States, which could usher in a new capital inflow cycle to emerging markets, including Malaysia, as investors return to the game of yield hunting.
In addition, positive earnings surprises from Corporate Malaysia, driven by improved efficiency, particularly in government-linked companies and better pricing power amid consolidation in various sectors, could also boost the local equity market, it says.
Further easing of the US-China trade/tech tensions, and optimism on Malaysia’s longer-term economic prospects, driven by trade/foreign direct investment (FDI) diversion to Malaysia amid the trade war could also lift the FBM KLCI, it adds.
AmInvestment Bank Research says it is positive and “overweight” on banks, consumer and telecommunications sectors for the second half of 2019.
In terms of stock picks, the brokerage favours MALAYAN BANKING BHD (Maybank), RHB Bank Bhd, Axiata Group Bhd, Dialog Group Bhd, Serba Dinamik Holdings Bhd, Top Glove Corp Bhd, Malaysia Pacific Industries Bhd (MPI), BERMAZ AUTO BHD, Berjaya Food Bhd and Malayan Flour Mills Bhd.
Meanwhile, UOB Kay Hian expects Malaysian equities to see a modest recovery in the second half of 2019 after the down period in the first half.
The brokerage bases its optimism on expectations that tangible benefits could emerge from the Government’s policy shifts to address growth issues and re-engaging China in the growth equation.
In addition, it notes, earlier misgivings on the country’s finances have abated and the ringgit has softened to a fairly defendable level, while rising mergers & acquisitions (M&A) activities are sweetening market returns.
“While corporate earnings would likely suffer another flattish year, as economic growth deteriorates through the second quarter of 2019, growth outlook will improve particularly towards the fourth quarter of the year, as various mega infrastructure projects gain construction significance,” UOB Kay Hian says in its recent strategy report.
“Despite the uncertainty over Malaysia’s exclusion from the FTSE WGBI, the ringgit’s steep year-to-date fall against the greenback should moderate amid healthy FDI and current account surpluses,” it adds.
UOB Kay Hian expects the FBM KLCI to end the year at 1,725 points, pegging its target to 17.2 times 2019 earnings to factor in the lagged earnings impact from the government’s pro-growth policy.
It says upside for the market remains limited by uncertainties tied to the US-China trade war and domestic political landscape, particularly in 2020.
Thematically, we advocate a tactical trading strategy that primarily focuses on infra plays and selective exporters, followed by niche plays with the water infra, solar, Environmental, Social and Governance (ESG) and oil & gas (O&G) themes.
“We expect a resurgence of the infra-related investment theme in the third quarter of 2019 amid a pickup in mega project rollout,” UOB Kay Hian says.
“Besides this, we expect sweet returns from selected exporters (winners of the US-China trade war and ringgit devaluation), and we foresee emerging sub-themes in water infra; solar IPP tenders; ESG; and O&G (decommissioning),” it adds.
UOB Kay Hian is “overweight” on utility, telecommunications, electronics manufacturing services, and healthcare sectors, and “underweight” on the structurally challenged property sector and cyclical stock, which are indirectly impacted by the US-China trade war.
As for stock picks, in the big-cap segment, it favours Axiata, CIMB GROUP HOLDINGS BHD, IHH HEALTHCARE BHD, Tenaga Nasional Bhd (TNB) and Yinson Holdings Bhd, while in the small/mid-cap segment, it likes Gabungan AQRS Bhd, MALAYSIAN RESOURCES CORP Bhd, My EG Services Bhd, Scientex Bhd and VS Industry Bhd.
Kenanga Research, on the other hand, has selected Alliance Bank Malaysia Bhd, CIMB, D&O Green Technologies Bhd, Hartalega Holdings Bhd, Kossan Rubber Industries Bhd, MBM RESOURCES BHD, MyNews Holdings Bhd, Pantech Group Holdings, Power Root Bhd and SAPURA ENERGY BHD as its top picks for the near term up to the end of September this year.
In terms of sectors, the brokerage is “overweight” on aviation, banks & non-bank financials, gaming, gloves and technology/semiconductor.
Kenanga Research expects the FBM KLCI to end the year at 1,745 points, which is valued at 19 times 2019 earnings and 18 times 2020 earnings.
It notes the local market will need the support of strong catalysts, on top of the potentially better-than-expected budget announcement and favourable external conditions to perform well.
“Despite the uninspiring growth numbers, we are not giving up, as we begin to see improvements in market data and statistics,” Kenanga Research says in its recent strategy report.
“We believe M&As could act as the much-needed and much-awaited market catalysts,” it adds.
On M&As, the brokerage says, besides the telecommunications sector, involving Axiata and Telenor, the market could potentially see talks emerging in the banking sector as well.
According to MIDF Research, trading activities in the local equity market will likely be strong in the second half of 2019.
The brokerage reckons geopolitical events would continue to cast a shadow on investors’ sentiment on the local equity market. Nevertheless, it opines that there is still strong basis for Corporate Malaysia to register decent earnings growth.
MIDF Research is optimistic that the FBM KLCI will rise to end at 1,720 points at the end of this year.
“Despite challenging operating landscape arising from the recent developments on the geopolitical scene as well as domestic factors, there are still reasons to be optimistic,” it says.
Among these are the overnight policy rate (OPR) cut, which could stimulate loan growth and domestic consumption; depreciating ringgit, which benefits exporters; revival of major infrastructure projects such as the East Coast Rail Link (ECRL) and Bandar Malaysia; prudent cost control by corporations; and digitalisation by industries.
MIDF Research is “positive” on the automotive, aviation, banks, healthcare, insurance, O&G (downstream) and power sectors.
According to Public Investment Bank Research, momentum is on the side of the local equity market, which has been a clear laggard, as it catches up with regional peers.
“Barring any significant economic downturns which could hurt earnings, the market is poised to trend higher going into 2020, as investors buy into the improving investment merits (and earnings) of Corporate Malaysia. Longer-term prospects are also underpinned by markets having moved (in recent times) in tandem with the earnings picture,” Public Invest says.
In addition, it says, the relative undervaluation of the ringgit is expected to drive foreign-based investors into the Malaysian equity market to benefit from its upsides, in addition to capital appreciation. This will drive the benchmark indices higher.
“Expectations of improvement on the macro front is driving sentiment, as is the government’s focus on growth in its second year of administration post ‘fire-fighting’ in the first. Resumption of the Bandar Malaysia and East Coast Rail Link projects are case in point,” Public Invest writes in its strategy report.
“With improving fundamentals of its own, the market may also get a lift from liquidity-driven infusions, particularly if rates are cut globally,” it adds.
Public Invest pegs 1,690 points as its end-2019 target based on 16.5 times forward earnings.
The brokerage foresees opportunities arising from large-cap names, though selective exposure to the smaller caps is also suggested.
Public Invest is “overweight” on O&G and manufacturing, while advising selective exposure to banking. It notes construction is also looking increasingly attractive as the government is seemingly more likely to stimulate public sector investment in the coming months.
Balancing the prevailing risks and potential, Maybank Investment Bank (MaybankIB) Research maintains its end-2019 target at 1,680 points, which implies 16 times forward earnings.
“We reiterate our defensive strategy for equities. Windows to pick up on values will be during periods of weak global economic data releases, reaffirming the effects of the US-China trade tension, while for a trade will be in periods of ringgit volatility, and running up to Budget 2020,” the brokerage says in its strategy report.
“A second OPR cut for 2019 will lift sentiment in the consumer-related sectors, although its impact on the broad market could be muted due to its negative impact on banks’ earnings,” it adds.
According to MaybankIB Research, there are reasons to be constructive on Malaysia’s equity market. For one thing, policy risks are dissipating; for another, there remains policy flexibility to support growth, and there are opportunities arising from the US-China trade tensions.
Nevertheless, there are reasons to be cautious too.
“Our baseline is a period of US-China trade tension overhang despite talks restarting, which implies volatility would continue,” MaybankIB Research says.
“For Malaysia, the other risk events are FTSE Russell’s decision on Malaysia bonds on its WGBI which may drive sizeable outflows from the bond market leading to ringgit volatility, and Budget 2020, as investors weigh on the Government’s options in lowering its fiscal deficit target further vis-a-vis policies to promote growth,” it adds, noting an expansionary budget will lift sentiment but it will also raise concerns on international rating agencies’ reaction.
MaybankIB Research lists OPR cut; ringgit volatility; trade war beneficiaries; M&As and privatisations; and step-up enforcement on illegal “sin” operators as the five investment themes for the second half of 2019.
Meanwhile, CGS-CIMB Research says it expects the FBM KLCI to remain volatile in the second half of 2019 due to earnings risks, policy uncertainties and external risks.
The brokerage’s end-2019 target is 1,596 points based on 15.5 times forward earnings to reflect short-term domestic policy as well as external uncertainties.
“We expect the market to stay volatile due to earnings risk concerns though recent truce between the US and China are likely to lead to positive market sentiment in the short term,” it says.
CGS-CIMB Research’s top three picks for the immediate term are MPI, Dialog and Supermax Corp Bhd.
Given the market uncertainties, TA Research advises investors to remain defensive and avoid overvalued blue chips with high foreign exposure.
The brokerage, however, notes thematic plays into domestic sectors, O&G, value and growth stocks that are fundamentally solid, are recommended for selective exposure.
TA Research maintains its end-2019 FBM KLCI target at 1,700 points based on 16.3 times estimated 2020 earnings.
In its strategy report, it says it expects the 2019 earnings of the 30 component stocks that make up FBM KLCI to contract by 3.7% before rebounding strongly 9.3% in 2020 due to low-base effect and higher growth from key banking, telecommunications, plantation and O&G stocks.
“Market conditions will remain fluid, with limited upside in the second half of 2019, beleaguered by the US and China trade war issues,” TA Research explains.
“If the US strikes again as threatened, our worst-case target of 1,490 for 2019 will no longer be a distant reality, as retaliation from China will erode investor confidence,” it says.
According to TA Research, although Malaysia is a key beneficiary of trade diversion, this should be short-term in nature and will not make up for the long-term losses, as consumption and private investment shrink as a result of lower global demand.
It points out that the impending Brexit in October could be another key dampener to the market.
Did you find this article insightful?