External factors to weigh on equities

PETALING JAYA: External headwinds and increasing interest rates globally will continue to weigh on equity valuations and overall sentiment.

Kenanga Research said this in a report to clients adding it was reducing its year-end FBM KLCI target by 5% to 1,500 points based on 15.5 times 2022 earnings.

This is a revision downwards from an earlier 1,580 points target based on 16 times to reflect the prospects of extended higher interest rates globally.

“If the current hyperinflationary cycle is to follow the symmetrical pattern in the past (particularly in 1974 and 1979-1980), it may take at least another 12-18 months before the current hyperinflationary cycle in the United States (and the world as a whole) comes to an end,” it said.

MIDF Research, meanwhile, in a short comment on the World Bank upgrading its target for Malaysia’s economic growth to 6.4% from an earlier 5.5%, said World Bank’s latest projection was slightly lower than its forecast 6.6% growth for this year.

“Despite a food inflation spike, we view overall inflationary pressure to stay stable, less than an average of 3.5% for 2022, thanks to the capped fuel prices.

“The stable overall inflation rate indirectly supports Malaysia’s domestic demand to stay afloat,” it stated.

The World Bank has lowered its 2023 growth target for Malaysia to 4.2% from 4.5% earlier and warned that significant headwinds will continue to persist.

Similarly, Kenanga said global supply chain disruptions were still far from over with the zero-Covid policy still being in full force in China, more so, ahead of the consequential 20th National Congress of the Chinese Communist Party in mid-October.

“We advocate investors to seek refuge in domestically-driven sectors amidst rising external headwinds.

“We expect the government policy of strengthening support for domestic demand and economic activities – since the outbreak of Covid-19, through the pandemic recovery phase – to be reinforced in the coming Budget 2023,” it said.

Kenanga added banks were the best proxy to Malaysia’s resilient economy, in particular, domestic consumption.

“Similarly, earnings of telcos will be supported by domestic consumption and spared the external headwinds.

“Auto makers and distributors have strong earnings visibility underpinned by order backlogs sizeable enough to keep them going for the next seven to eight months,” said the research house.

It expects “mid-market” retailers to continue to do well given their customer base that is skewed towards the M40 group, whose spending power is less impacted by the high inflation given a healthy household balance sheet.

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