Stock market in consolidation mode


One analyst notes that local blue-chip stocks have been overdue for a correction, hence the underperformance.

The past one month has been a lacklustre month for local blue-chip stocks as investors take profit.

Since August, the benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) has shed almost 6%.

Conversely, though, small cap and ACE Market stocks have been performing well, sustained by buying interest from retail investors.

The FBM ACE Market Index, for instance, has gained about 27%, while the FBM Small Cap Index has risen about 5% over the past one month.

One analyst notes that local blue-chip stocks have been overdue for a correction, hence the underperformance.

Small cap and ACE Market stocks, on the other hand, are a bit harder to gauge due to the element of speculative buying.

“Valuation of the FBM KLCI, which is composed of the 30 largest companies in the stock market, appears lofty at current levels, especially after the recent poor showing in corporate earnings, ” the analyst, who requested to remain anonymous, tells StarBizweek.

“Hence, these stocks are due for correction.

“But we expect the downside for these stocks to be limited, thanks to ample liquidity in the market and the low interest rates, which are driving investors into the equity market for better return, ” he explains.As for small cap and ACE Market stocks, the analyst says, they will largely be driven by mom-and-pop investors who are chasing return.

“It is undeniable that there is an element of speculative buying in small cap and ACE Market stocks.

“Hence, investors should exert caution when attempting to churn out profits from these stocks, ” he says.

“The best thing to do is to pick up stocks that have strong fundamentals, as they are the ones that are more resilient in volatile times, and they will likely perform well in the long run, ” he argues.

Rising fears

Malaysian equities managed to end yesterday relatively unchanged after paring losses, driven by a steep selloff in US shares overnight, as investors dumped technology stocks amid heightened concerns ahead of US jobs data.

The FBM KLCI yesterday gained a mere 0.46 point, 0.03%, to close at 1,515.86, off an intra-day low of 1,498.72.

Market breadth was negative, with losers leading gainers by 657 to 388, while 432 counters closed.

Trading volume stood at 7.04 billion shares worth RM4.1bil.

According to Reuters, Thursday’s tumble in US stocks was the biggest one-day percentage drop on the tech-focused Nasdaq 100 since March, and the darling stocks of recent months were the hardest hit.

For instance, Apple fell 8%, Tesla 9% and Microsoft 6%.

Still, the plunge only wound the Nasdaq back as far as where it sat last Tuesday.

The index was still up 28% for the year so far and 73% higher than its March trough. “No single factor sparked the selloff, ” said JP Morgan Asset Management global market strategist Kerry Craig told Reuters, citing more general worries the rally had run too far, too fast.

“However, this is unlikely to be a repeat of the tech wreck of the late 1990s, given how much the market and sector have changed, ” he was quoted as saying by the newswire.

Meanwhile, Reuters also reported that Wall Street’s “fear gauge” had soared again, as investors spooked by Thursday’s market decline rushed to load up on options protection, but analysts said the intensity of the move in volatility does not necessarily point to a market crash.

The Cboe Volatility Index, which for weeks had been easing toward its longer-term average price of 19.4, on Thursday jumped 7.03 points, its largest one-day rise since June 11, and ended the session at a nearly 10-week closing high of 33.60.

Recently, the VIX and S&P 500 index broke their historical pattern of moving in opposite directions by moving higher together, it reported.

Mixed outlook

Despite the challenging outlook, the worst in corporate earnings in Malaysia is likely behind us, analysts say.

This is based on the fact that most businesses have restarted operations since early-June, following the easing of the nationwide movement control order (MCO) aimed at containing the spread of Covid-19 in the country.

Corporate earnings for the second quarter ended June 30,2020, saw huge declines due to the full-blown impact of MCO.

Earnings for the FBM KLCI 30 constituents, for instance, fell about 49% year-on-year. MIDF Research adjusts its year-end 2020 baseline target for the FBM KLCI to 1,400 points from 1,320 points previously.

The brokerage said at a 10-year historical mean price-earning (PE) valuation (forward year) of 14.8 times, the baseline fair value of FBM KLCI is calculated at 1,380 points. Its year-end target has been accorded a slight premium.

Maybank Investment Bank, on the other hand, maintained its end-2020 KLCI target at 1,505 based on 16 times forward earnings. Public Investment Bank, which downgraded its earnings estimates for FBM KLCI, has maintained its end of the year target at 1,480.

“While adjustments to earnings this current quarter should result in a reduction of our end-2020 FBM KLCI target to 1,430 points, we are maintaining our expectation of a 1,480 point closing this year-end owing to liquidity-driven ‘exuberances’, ” the brokerage explains.

“The market appears to still be underpinned by expectation at this juncture – expectation of a V-shaped recovery in earnings, expectations of a V-shaped recovery in economic growth.

“The flush liquidity amid interest rates which have been cut to all-time lows, conditions we last saw in 2008/2009, is feeding the hunger for investment returns, hence the market not reacting particularly negatively to supposedly bad earnings reports (for the first and second quarters of the year), ” it adds.

AllianceDBS Research is more optimistic, maintaining its end-2020 KLCI target at 1,600.

The forecast is based on 18 times earnings or the five-year mean forward PE multiple.“The flush of liquidity in the market has largely negated the impact of earnings deterioration and remains supportive of the equity market, ” the brokerage says.

“The potential entry of two glove makers into the FBM KLCI by December could significantly increase the weightage of the healthcare sector. “This tends to command much higher valuations and may lift overall valuation of the index, ” it adds.

AllianceDBS expects the FBM KLCI earnings to contract 17% in 2020 before rebounding 24% in 2021.

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