PETALING JAYA: The improving corporate earnings, supported by the reopening of the economy as the Covid-19 vaccination programme expands, will help lift the Malaysian equity market.
Analysts have projected that the benchmark FBM KLCI would continue to trend higher in the coming months and end the year on a strong note as investor confidence continues to build amid better corporate results.
UOB Kay Hian Research, for instance, had raised its end-2021 FBM KLCI target to 1,680 from 1,640 previously.
The raised target, which valued the market at 14.7 times 2021 price-earnings (PE), reflected a substantially higher earnings base after the inclusion of glovemaker Supermax Corp Bhd to the FBM KLCI.
“We adjust our 2021-22 universe forecasts by +1.7% and +1.2%, respectively, pricing in the uptrend in the crude palm oil price and glove producers’ aggressive price hikes. We conservatively raise the year-end FBM KLCI target to 1,680, ” the brokerage said.
“We deliberately assume a conservative valuation given the market’s high dependency on glove profits (26% of universe coverage). Positively, we reckon that FBM KLCI has troughed, as the glove producers’ stocks have bottomed out, with most trading at low single-digit concurrent year earnings, ” it added.
UOB Kay Hian noted reopening plays were expected to drive the market.
“While the equity market has broadly behaved within our predictions for an uneven recovery and for reopening plays to gain momentum, technology stocks jumped well above our original expectations and glove producers’ valuations plunged prematurely, ” it said.
“We expect reopening plays to deepen as the country prepares to vaccinate 70% of the population by year-end, ” it added.
Its top stock picks were Axiata Group Bhd, CIMB Group Holdings Bhd, Genting Malaysia Bhd, Inari Amertron Bhd, My EG Services Bhd, Sunway Bhd, Astro Malaysia Holdings Bhd, Pavilion REIT and Supercomnet Technologies Bhd. It reckoned Top Glove Corp Bhd, Supermax and Genting Bhd as good trading candidates.
Meanwhile, Affin Hwang Capital Research maintained its “neutral” call on the FBM KLCI with an unchanged end-2021 target of 1,730, based on a five-year mean PE of 18.6 times and on the 2022 estimated market earnings.
“We think that our 34% earnings per share growth forecast for the FBM KLCI for 2021 could be largely priced in already, ” the brokerage explained.
In the near term, with limited upside for the ringgit and the ongoing political uncertainty, the prospects for a reversal of foreign fund flows would be limited, it said.
It had upgraded banks and healthcare “overweight” from “neutral’ previously, and downgraded utilities to “neutral”.
“We continue to advocate sticking to growth sectors such as electronics manufacturing service, technology, building materials and gloves. Banks, healthcare and real estate investment trusts are our picks for recovery plays, ” it added.
According to RHB Research, as inoculations gain traction, market psychology would start re-pivoting towards a post-pandemic scenario.
“We expect markets to be supported on the downside, but corrections should be seen as opportunities to gradually re-position into cyclical and value stocks, ” the brokerage said, adding it was “overweight” on banks, gloves, gaming, construction, basic materials, automobiles, non-bank financial institutions, oil and gas, utilities as well as healthcare.
“Management teams generally guided for a better business environment in the second half of 2021, but some challenges remain in first half.
“The recovery scenario looks increasingly entrenched, as the national immunisation programme gets underway.
“We remain constructive on the outlook for equities on a 12-month perspective, and look for opportunities to raise weightings on cyclical and value sectors, ” it said.
RHB Research said it could not rule out further kitchen-sinking and downgrades in the near term.
However, such risks should be viewed as a postponement of economic and corporate earnings growth by up to two quarters, it explained.
Overall equity markets would remain supported by accommodative monetary policies, robust liquidity conditions and the Covid-19 vaccine, it said.