PETALING JAYA: CGS-CIMB Research expects trading activity on Bursa Malaysia to remain volatile in the second half of the year (2H22) as market sentiment remains weak with potential further downside risks in the third quarter of 2022 (3Q22).
That is as investors worry about corporate earnings and try to price in the peak of the interest rate cycle by the Federal Reserve (Fed) which is trying to engineer a soft landing of the American economy that is facing inflationary pressures.
The brokerage noted the benchmark 30-stock FBM KLCI has fallen by 16% from its highs of 1,685 points in December 2020 after pricing in the earnings risks from a slowing global economy and political concerns and could go lower in the 3Q22 pricing in the next rate hikes by the Fed as well as lower commodity prices and higher costs due to rise in the minimum wage level.
“Thereafter, the market could be range-bound with potential upside if concerns over rate hikes or US recession risks subside and earnings risks for Malaysian corporates have been priced in.
“This could offer trading opportunities for investors looking for bargains in the stock market over the medium term,” CGS-CIMB Research said.
CGS-CIMB Research lowered its earnings estimates for the FBM KLCI to reflect its earnings downgrade for Top Glove Corp Bhd and MR DIY Group (M) Bhd. The research outfit now projects the market benchmark’s earnings to fall 0.1% in 2022 and rise 10.7% in 2023.
“This lowers our end-2022 FBM KLCI target to 1,506 points (from 1,568 points), on unchanged 12.9 times target price-to-earnings (2.5 standard deviation below three-year mean).
“We advise investors to take shelter in sectors with defensive earnings (utilities, telco, healthcare, consumers) and high dividend yields. We also like banks as beneficiaries of rising interest rates,” it stated.
CGS-CIMB Research noted the earnings of the FBM KLCI during the global financial crisis in 2008 fell by 8.7% due to the collapse in commodity prices and consumer sentiment before rebounding in 2009 while during the Covid-19 pandemic, earnings fell by 6.6%, due to a significant drop in demand caused by lockdown measures.
“Given the high inflation and rising risk of a US recession, there could be downside risks to our 2023 earnings growth forecast of 10.7%.
“If we assume that FBM KLCI earnings reflect a similar degree of decline as during the global financial crisis (i.e. minus 8.7%) abd Covid-19 (minus 6.6%), our FBM KLCI target falls to 1,213 and 1,245 points from the revised FBM KLCI target of 1,506 points.”
CGS-CIMB Research analysis of past market downturns revealed that in four out of the past six downturn cycles since 1997, the FBM KLCI bottomed in the August to October period.
The exception was during the dotCom bubble when the market bottomed in April and during the Covid-19 pandemic where it bottomed in March.
Historically, during a market downturn period, the FBM KLCI corrected by 16% to 79% from its peak. The index has fallen by 15% from its recent peak of 1,685 points in December 2020, which means Bursa Malaysia is not in a bear market.
To be in a bear market, the market needs to fall to 1,348 points or below.
CGS-CIMB Research said investor sentiment and the market could get a lift from the return of foreign workers to worker-starved sectors, better-than-expected inbound tourist numbers,
Easing inflationary pressure could also contribute together with the resolution to some of the environmental, social and governance concerns relating to forced labour, a market friendly Budget 2023, and additional liquidity at domestic institutional funds like the Employees Provident Fund following the end of the withdrawal schemes under stimulus packages announced in 2020, 2021 and 1H22 totalling around RM141bil.
The report noted the 15th General Election (GE15) will be crucial as a more stable political environment post-GE15 could provide more clarity and certainty on policy direction on issues like 5G, foreign workers and construction projects which would help boost earnings visibility and investments and in turn attracted liquidity into the equity market from domestic and foreign institutional investors.
Sectors that tend to perform better against the market benchmark during past market downturns were consumer, technology, telco, healthcare and utilities, CGS-CIMB Research added, leading it to suggest investors best take shelter in utilities (Gas Malaysia Bhd, Malakoff Corp Bhd and Tenaga Nasional Bhd), telco (Telekom Malaysia Bhd), healthcare (IHH Healthcare Bhd), consumer (QL Resources Bhd, MR DIY and Genting Malaysia Bhd).
The brokerage identified seven themes for 2H22, namely beneficiaries of the overnight policy rate hike cycle (RHB Bank Bhd, Hong Leong Bank Bhd, Public Bank Bhd, AMMB Holdings Bhd), beneficiaries of a weaker ringgit (IHH, PBB Group Bhd, Yinson Holdings Bhd)
Other themes include high dividend yielders (Maxis Bhd, Gas Malaysia); beneficiaries of GE15 (Telekom, Maxis, Tenaga Nasional Bhd, Gamuda Bhd, Farm Fresh Bhd); value plays (WCT Holdings Bhd, SP Setia Bhd, UEM Sunrise Bhd, Star Media Group Bhd); ESG picks (Malayan Banking Bhd, AMMB) and ESG and syariah picks (MISC Bhd, Dialog Group Bhd, Maxis Bhd).
CGS-CIMB Research retains RHB Bank (target price of RM7.70), MR DIY (target price of RM2.40) and Genting Malaysia (target price of RM3.40) as its top three picks.