As in the case of global stock markets, Malaysian equities have had a strong run from their multi-year lows in mid-March this year.
But as most investors have observed over the years, the market rarely keeps on moving up for so long without some form of downward correction, especially when there are still so many unresolved uncertainties affecting sentiment. This leads some analysts to argue that a pullback of the market in the near term is inevitable, and even necessary.
One analyst from a bank-backed research house puts it this way: A healthy correction is probably overdue now.
“The local bourse appears pricey at current levels it wouldn’t make sense for the market to keep on rising, especially on the back of so many downside risks such as the economic fallout of the Covid-19 pandemic, and growing geopolitical tensions, ” the analyst, who requested to remain anonymous, tells StarBizweek.
“Our view is that the rebound in stocks from their mid-March lows may be overdone, hence the risk of a correction in the near term as investors react to disappointment in upcoming economic data or medical progress amid the coronavirus (Covid-19) pandemic, ” he argues.
While JF Apex Securities head of research Lee Chung Cheng concurs that the market could see a correction in the near term, it would unlikely fall to the level it did in mid-March, as the excessive liquidity (that is, money flows) would help cushion the market fall.
“The (recent) rally is mainly driven by retail investors; and market sentiment could swing fast, ” he says. “The market could due for correction, but the index may not revisit March’s low, as market is still flushed with domestic liquidity, ” he tells StarBizweek.
Lee notes the second wave of the Covid-19 pandemic; snap polls in light of the domestic political uncertainties; oil price volatility; and sovereign rating risks for emerging markets are some of the likely factors that could trigger the correction of the local bourse.
The local bourse traded sideways yesterday, with the benchmark FTSE Bursa Malaysia KL Composite Index (FBM KLCI) ending 2.35 points higher at 1,507.26 amid persistent concerns over a second wave of Covid-19 virus infections worldwide. That represented a strong rebound of about 23% from the multi-year low of 1,219.17 on March 19.
Year-to-date, the local bourse is still down by about 5%.
Still, the FBM KLCI is considered one of the best-performing indexes in Asia over the last six months, compared to its Asean peers, which remain in double-digit losses despite their strong recoveries from the global market meltdown about three months ago.
Analysts note as a low-beta market, with decent dividend yields, Malaysian equities tend to stand out in volatile times. This in part explains the reason it has performed better that its regional peers over the last six months, as markets were rocked by uncertainties stemming from the US-China trade war, geopolitical tensions and the Covid-19 outbreak.
At current levels, the FBM KLCI is valued at around 18.7 times price-earnings (PE), according to Bloomberg data.
Lee sees the market as “fully valued” at the moment, with the FBM KLCI trading now trading at 16-17 times the estimated forward PE, which is slightly above its average in view of current economic and domestic political uncertainties.
“We believe there is a downside risk on corporate earnings as business activities would not return to pre-pandemic level anytime soon after reopening of the economy, ” he explains.
An analyst notes the market has rallied despite falling earnings estimates, hence the upward pressure on valuations.
“The sustainability of the current market valuations is being questioned because there are plenty of risks that could affect sentiment, ” he says.
Selling pressure expected
Meanwhile, MIDF Research has revised its FBM KLCI end-2020 target for the third time since early March due to heightened market volatility in reaction to the fluidity in the macro environment.
“The underlying (tacit) recommendation of our FBM KLCI end-2020 target since the onset of Covid-19 pandemic in March has shifted from buy, then hold and now sell, ” the brokerage said in its note last week.
The brokerage’s FBM KLCI end-2020 target is now at 1,320 points, compared with 1,400 points in mid-April and 1,480 points in mid-March.
At current levels, the market seemed to impute blue-sky scenario in regard to the post-lockdown economic recovery, MIDF Research said.
However, it noted recent statements by the US Federal Reserve as well as cue from China (already in post-lockdown) suggested that post-lockdown economic recovery might not be plain sailing.
According to MIDF Research, the second downward thrust may emerge, possibly in the third quarter, as the fuller extent of economic and corporate earnings impact of Covid-19 become evident.
“Moving forward, possibly in the third quarter, we expect the equity market to encounter another wave of selling pressure, that is, a second downward thrust (fallout phase) as the real extent of economic/corporate earnings impact of Covid-19 manifest, ” it said.
“During the current and ensuing quarters, the economic/corporate earnings data may continue to deteriorate based on year-on-year basis, while the post-lockdown monthly sequential (month-on-month) jump may quickly fizzle out as pent-up demand in the aftermath of the economic reopening is duly satisfied, ” it added.
During this period, we may see the next wave of selling in the equity market, MIDF noted.
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