PETALING JAYA: Bank Negara’s stance that Malaysia’s economy will rebound from the second quarter has sparked much confidence in the market as investors seek new catalysts.
It was a much needed assurance by the regulator, as the FBM KLCI has only traded sideways with a decline of 1.24% year-to-date (y-t-d) due to factors such as the reimposition of the movement control order (MCO) in January that piled on the uncertainties over an economic recovery.
The benchmark index kicked off the second quarter yesterday on a positive note, adding 9.13 points or 0.58% to 1,582.64 points.
This was also partially due to a technical rebound from Wednesday’s oversold position that saw the FBM KLCI tanking 35.68 points after holding on to the 1,600-point region for about a month.
Equity analysts and fund managers expected the situation to improve as economic growth and corporate earnings are expected to perform better.
Market participation is also expected to remain vibrant as retail investors continue jumping into the stock market as interest rate remains at a historical low of 1.75%.
Areca Capital chief executive officer Danny Wong (pic below) said the situation of a subsiding pandemic and economic recovery would happen, with corporate profits following suit.
“The market always moves ahead of the recovery and thus, the market will buy ahead.
“However, do not expect it to be a smooth ride due to uncertainties, noises and profit-taking activity.
“There will be bumps along the potential recovery, ” he told StarBiz.
Kenanga Research said the domestic economic conditions were set to improve substantially from the second quarter, setting the stage for a strong rebound of the FBM KLCI.
It said the economic landscape looked more promising as corporate earnings head back to pre-Covid-19 levels.
“Barring the occasional disruption to vaccinations caused by precautionary measures taken due to post-inoculation side effects, infection rates are generally falling worldwide. With Malaysia’s 2020 gross domestic product (GDP) contraction of 5.6% behind us, the economy entered 2021 struggling to overcome the impact of MCO 2.0 due to spikes in daily new cases.
“This portends for a weak first quarter of 2021 while the fourth quarter of 2020 results season was mildly positive, beating low expectations, ” it said.
The research house added that in terms of GDP, the first quarter this year should likely be the last quarter of negative year-on-year (y-o-y) growth.
It expected the GDP momentum to turn positive from the second quarter, with a rise in both y-o-y and sequential figures.
Kenanga’s end-2021 FBM KLCI target is 1,745 points, which was arrived at by applying a forward price to earnings ratio of 15.6 times to the FBM KLCI’s projected 2022 earnings per share (EPS) of 111.8 sen.
The sectors that Kenanga has an “overweight” call are automotive, banks, building materials, construction, gaming, real estate investment trusts (REITs), rubber gloves, technology and utilities.
It pointed out that REITs were clear laggards last year and y-t-d 2021 but they hold promising prospects for reversal this year.
While more “mini-waves” cannot be ruled out, Kenanga said mall operators, retailers and shoppers were better able to deal with required procedures and hence, negative impacts should likely be lesser.
“Net income should pick up strongly later this year on expectations that infections will drop sharply in the second half.
“We expect the recovery momentum to extend into 2022. But such a prospect is not yet priced into retail REITs with deep values waiting to be reaped, ” it said.
Top on Kenanga’s “buy” list are KLCC Property Holdings Bhd and Perak Transit Bhd, the latter which although is not a REIT, has growing recurring incomes that will benefit from easing of movement restrictions.
It also said the projected global GDP recovery of 5.5% in 2021 from -3.5% in 2020 bodes well for Malaysia’s exports, benefiting the tech sector especially while banks are seen to be benefitting from the steepening of the yield curve amid stabilising overnight policy rate, improving credit costs and stronger loans growth.
UOB Kay Hian Research said the FBM KLCI should recover from the current low-end of its assessed trading range as the global run-up of long-term bond yields should be near the peak.
Maintaining its end-2021 target at 1,680 points, the research house said the downside of glove stocks was limited from hereon and the market would be pricing in much more of the economic reopening effects as the nation’s Covid-19 vaccination programme accelerates in the second half.