Plantation and banking sectors to drive growth
KUALA LUMPUR: Corporate earnings in Malaysia are forecast to grow by 6% to 7% in 2023, based on the overall consensus view of equity analysts, depending on how the economic landscape plays out in the next 12 months, says Standard Chartered Bank (StanChart).
“Given where crude palm oil prices are and as the banking or financial sector is a key component of the local stock exchange – close to 40% of the earnings come from the financial sector – these two core sectors alone should drive a fair bit of the earnings coming through,” said StanChart head of managed investment and investment advisory Danny Chang.
He was speaking at an online briefing yesterday on the global market outlook for the second half of 2022.
“I think where the disappointments people might be seeing – there could still be laggards in the real estate and construction sector, which may pull back some of the profitability from a corporate earnings point of view,” he added.
Chang also said Malaysia’s corporate earnings in 2023 could see a lift if there is further pick-up in China’s economy.
“There is a small joke – that people often say if China sneezes, Malaysia catches a cold, right? That’s true partly because almost a fifth to a quarter of our exports go to China.
“So, if you believe China is stepping out and growing, then okay. Clearly China is looking at a looser monetary policy and the likelihood of more significant lockdowns than what we saw last year is unlikely to take place.
“There are the common prosperity policies and the central administration is looking to stimulate specific sectors, particularly in clean energy and semiconductors. If there’s a reason to like Malaysia, part of it because China is lifting upward,” he explained.
Chang added that he sees “great opportunities in Chinese equities.”
“From a valuation perspective, Chinese equities are at a more attractive valuation and supported by better earnings growth,” he said.
Meanwhile, StanChart head of asset allocation and thematic strategy Audrey Goh said Asian equities are expected to outperform markets in the United States and Europe and other developed regions.
“Our preferred areas have been China and India. On Malaysia, we are slightly a bit more lukewarm because I think inflationary pressure is still quite high in Malaysia.
“And I don’t see Bank Negara cutting rates or even more fiscal spending to help support growth,” she said.
Goh noted that while China has been adopting much more stringent Covid-19 lockdowns, which have impacted growth recently, this should not be viewed as something which is permanent.
“Eventually they will have to remove some of the restrictions when it comes to lockdowns and thereby, allowing economic activities to recover,” she said.
A StanChart report on the global market outlook for the second half of 2022 pointed out that central banks are walking a fine line between controlling inflation and avoiding a recession.
“We expect inflation to ease only gradually, causing the Federal Reserve (Fed) to maintain its aggressive stance. Investors will also have to gauge the extent to which risks are priced,” said StanChart.
The bank also believes investors should raise allocations to bonds at the expense of equities, add multi-asset income strategies and tilt towards Asia ex-Japan and UK equities “as the three ways to navigate this tightrope”.
“Gold, inflation hedges and private assets can help mitigate risks from the Fed tightening.
“Opportunistic ideas include defensive sectors in the United States and Europe, cyclical sectors in China, commodity currencies and our longer-term investment themes,” it added.
The report also said while the United States’ recession risks are rising sharply, China is recovering.
“The second half of 2022 is expected to be dominated by three macroeconomic questions. The first is on US inflation: has it peaked or will it stay elevated or rise even further?
“The second, and related, question is whether the Fed will tighten its policy to the point that it pushes the US economy into recession within the next six to 12 months.
“The third is whether China’s policy support will help the economy rebound and thus diverge from the slowing US and European economies,” said the report.
StanChart’s view is that US inflation has likely peaked in the first half.
However, the report explained that the pace of deceleration from here is likely to be slow, with inflation settling above 6% year-on-year by end-2022 (from 8% in the first half) and 4% by the second quarter of 2023.
It added that while long-term inflation expectations remain capped for now, new supply chain disruptions and another oil price spike could send inflation higher.
“This means the Fed, which has committed ‘unconditionally’ to combating price pressures, is likely to err on the side of tighter policy until it is clear inflation is turning sustainably lower.
“Thus, we now expect the Fed to raise rates by another 150 basis points to 3.25% by year-end, taking the rate beyond the Fed’s ‘neutral’ level of 2.5%.
“As Fed policy turns restrictive, the risk of a US recession in the next six to 12 months will rise significantly,” said StanChart.
The report said, nevertheless, a recession is not a foregone conclusion, especially given the strong US labour market.
“The Fed will have to walk a very thin tightrope as it tightens policy to ensure that the economy does not tip over,” it said.
StanChart also pointed out that China is on the opposite side of the economic cycle.
“Chinese policymakers have clearly signalled they are willing to offer a reasonable level of policy support, leading us to believe the economy will gradually recover from the sharp downturn in the first half,” it said.
