PETALING JAYA: Analysts have reduced their 2019 target for the FBM KLCI amid lacklustre corporate earnings in the second quarter, as well as investors reducing their exposure to emerging-market (EM) equities.
There was literally a “zero wow factor” in the just-concluded, second-quarter results, said AmInvestment Bank Research in a report.
“None of the FBM KLCI component stocks under our coverage beat our projections, while eight of them actually came in below our forecasts, ” it added.
The research house has cut its 2019 year-end FBM KLCI target to 1,680 points based on a 17 times revised 2020 forecast earnings projection, which is at a discount to its five-year historical average of about 18 times.
This compares with 1,820 points based on 18 times of its previous 2020 forecast earnings projection.
The FBM KLCI comprises stocks of the 30 largest companies on Bursa Malaysia and are made up of mainly banking, plantation, energy and telco shares.
Yesterday, the FBM KLCI closed eight points higher to 1,599.89 after it was battered down on Monday by 20 points, helped by news that Hong Kong’s chief executive officer Carrie Lam had formally withdrawn a proposed extradition bill which has caused riots in the city for weeks.
Meanwhile, UOB Kay Hian Malaysia Research said it expected corporate earnings for the FBM KLCI components to contract by 3.5% this year and expand by 6.2% in 2020.
“The FBM KLCI’s earnings cut is primarily driven by the hefty cut in the plantation sector earnings, followed by the banking sector by virtue of its high weightage in the index, ” it said in a note to clients.
It pointed out that 15 out of 27 sectors and sub-sectors under its coverage have suffered 2019 earnings downgrades, as the plantation, healthcare, building material (steel) and automobile sectors suffered deep forecast cuts.
UOB Kay Hian said only the gaming, glove, technology (EMS) and construction sectors benefitted from earnings upgrades.
“While we expect the market to turn more cautious in 2020, we still anticipate positive news flows in the next two to three months relating to the trade diversion, mega-project milestones relating to the Pan Borneo Highway Sabah, the East Coast Rail Link and Bandar Malaysia, and merger and acquisition activities, ” it said.
AmInvest reckoned that the FBM KLCI is unlikely to trade in line with its historical average, at least over the immediate term due to risks related to the trade war.
“Investors are likely to continue lightening their positions in high-risk asset classes such as equities and EM assets, while seeking refuge in safe-haven asset classes, including developed market bonds and even zero-yielding precious metals, ” it said.
It pointed out that typically, an easing cycle in the US would usher in a new capital inflow cycle to EMs, including Malaysia, as investors hunt for yields.
“As it stands now, the tailwind of an accommodative monetary policy by key central banks in the world has been negated by the headwinds of the heightened US-China trade tensions and a mounting global recession risk, as illustrated in the flattened, and at times, inverted US bond yield curve, ” AmInvest said.
Affin Hwang Investment Bank Bhd has cut its FBM KLCI 2019 year-end target to 1,650 points from 1,679 after reducing its 2019 FBM KLCI earnings on-year growth forecast to 0.2% from 1% previously.
“Broadly, we would prefer the large-cap names because of their better quality. However, given the expected market volatility, we think that a diligent stock selection is preferred over a stock market capitalisation bias strategy.
“We prefer companies with defensive earnings (within the healthcare space) and those that offer high yields (found in MReits), ” the research house said.