PETALING JAYA: The Malaysian equity market is expected to stage a strong rally in the final three months of 2023, with the benchmark FBM KLCI potentially reaching 1,610 points by year-end, lifted by two re-rating catalysts.
It is, however, probably going to get worse for the market in the coming months before the expected rebound towards the fourth quarter of this year (4Q23), according to CGS-CIMB Research.
“We expect the poor market sentiment to continue for the next few months despite forward valuations falling to two standard deviations below the post-Global Financial Crisis mean,” the brokerage said.
“That said, moving closer to 4Q of 2023, we expect two significant re-rating catalysts to emerge, causing a potential structural shift in liquidity flows and domestic sentiment,” it wrote in its report yesterday.
These rerating catalysts, according to CGS-CIMB Research, included a weakening of the US dollar, with a convincing break down of the US Dollar Index (DXY) below the psychological 100 mark.
The second re-rating catalyst would be from further easing of political uncertainties in Malaysia after the six state elections, expected to be held by the end of August.
The brokerage said this would help pave the way for Prime Minister Datuk Seri Anwar Ibrahim’s administration to focus on medium-term economic plans and policy reforms.
“Our earnings gap analysis shows that the FBM KLCI could reach 1,610 points by year-end, and 1,800 points by end-2024,” CGS-CIMB Research said.
The research house noted that while there was room for potentially one more US dollar rally over the summer, it expected that to be the beginning of the end to the rising greenback trend.
CGS CIMB Research expects the DXY to break below 100 by 4Q23 and trade down to the 90 to 95 points range over 2024, driven by muted US economic growth, a slightly dovish US Federal Reserve and the absence of extraordinary monetary stimulus.
And contrary to some expectations, CGS-CIMB Research expects Malaysia’s national unity coalition to perform reasonably well in the upcoming six state elections, on the back of a robust domestic economy.
“The impact on liquidity flows into surplus countries such as Malaysia, where domestic growth is good and the currency undervalued, could be relatively strong,” it explained.
CGS-CIMB Research’s sector picks were mainly based on a robust domestic economy, which it believed would be best played through banks, and construction and materials.
Sectors such as real estate and real estate investment trusts, or REITS, could also be good domestic plays and reflationary beneficiaries in the event of a period of prolonged US dollar weakness, it added.
The brokerage was also positive on oil services and conglomerates, in particular, those offering good growth at a reasonable price. As for technology, it said expectations built into the sector still seemed high, while plantations and gloves lacked meaningful catalysts amid earnings pressures over the next few quarters.
“With the right triggers in place, upside to the FBM KLCI and FBM100 could be significant, in our opinion, underscored by their multi-year low valuations,” CGS-CIMB Research said.