More potential upside to FBM KLCI seen in 4Q

CGS-CIMB Research, in its engagement with some 190 investors, found that many remained “neutral” to “bearish” on the stock market due to concerns over rising operating costs, policy risks and a possible 15th General Election

PETALING JAYA: The strong second quarter (2Q) gross domestic product (GDP) growth figure should be a catalyst for Bursa Malaysia to push higher although some investors believe hawkish major central banks focused on inflation and interest rates may dent sentiment and lead the FBM KLCI lower in the third quarter (3Q).

While the 8.9% 2Q GDP expansion has led to the full-year growth to be revised higher by economists, many believe the outcome of the Federal Reserve (Fed) meeting in September and fresh data will determine if the current rise in global markets, including the FBM KLCI, is not just a bear market rally.

CGS-CIMB Research, in its engagement with some 190 investors, found that many remained “neutral” to “bearish” on the stock market due to concerns over rising operating costs, policy risks and a possible 15th General Election.

“The equity market is likely to remain weak with downside risks in the 3Q, as it attempts to price in concerns over global monetary policy tightening.

“The market could rebound in late-4Q, with upside likely from a more stable political system, market-friendly budget and return of foreign workers,” CGS-CIMB Research said after a meeting with the investors.

While investor sentiment may remain guarded for now, the tailwinds for the local market include a broad-based recovery in the economy, undemanding valuations and rising earnings projections, according to Gerald Ambrose of abrdn Islamic Malaysia Sdn Bhd.

“The 2Q growth was a pleasant surprise and much stronger than what was registered by regional economies in the same period.

“There is value emerging in Bursa Malaysia with earnings per share (EPS) set to grow by 1% and 15% in 2022 and 2023 respectively while EPS contracts elsewhere,” he said.

He added from a valuation perspective – be it price to earnings (PE), price to book or dividend yields – Bursa Malaysia is trading at a discount to other Asean markets as opposed to trading at a premium in the past, due in part to the net selling by foreign and local funds in the past year.

While some investors may be awaiting the Fed’s move next month, others appear to have decided to cut through the noise and buy into the recovery theme as the benchmark FBM KLCI closed 14.77 point higher at 1518.78 points yesterday, driven by money flowing into consumer, telecommunications and plantation counters.

“The market may be starting to reflect the economy rebounding. Foreign fund inflows stood at net RM7.23bil year-to-date.

“The sector that saw the most net inflows from foreign funds has been financial services. We take that as an indication that investors have some confidence in the economic recovery given the performance of the financial services sector closely ties with the economic performance,” said MIDF Research head Imran Yassin Md Yusof.

He added that the research house is maintaining its year-end target of 1,600 points for the FBM KLCI on expectations valuation to gradually gravitate towards 15.5 times PE with the economic recovery priced in.

Imran said although there were pockets of headwinds from abroad, the impact on Malaysia would be moderate and hence, corporate earnings should to be robust this year with glove makers being the exception.

Ambrose said foreign funds and local institutional investors would turn net long on Bursa Malaysia as the economy sustains its expansionary path while major economies slow from policy impact.

What he would like to see is for the private sector in Malaysia to take the reigns on driving economic growth from the government which is now constrained by its elevated fiscal deficit position.

CGS-CIMB Research noted that Putrajaya could keep to its 6% fiscal deficit target this year despite the RM77bil allocated for subsidies, with better collection in commodity-related revenues amid high crude oil and palm oil prices.

The government is expected to collect more income as well as sales and service taxes from the better economic environment.

Any shortfall will be obtained from a higher dividend from Petroliam Nasional Bhd (additional RM15bil to RM20bil on top of the RM25bil already committed) as well as through reduction in some supply and services expenditure.

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