FBM KLCI likely to stage a rebound in Q4 on positive outlook

HLIB Research’s year-end FBM KLCI target stands at 1,530.

PETALING JAYA: The equity market is expected to remain sluggish in the third quarter of the year before staging a rebound towards the final three months of 2023 as economic headwinds subside.

Hong Leong Investment Bank (HLIB) Research summed this up as a tale of two halves for the next six months of the year.

In its latest strategy report, the brokerage said market weakness would likely persist into the third quarter, given the impending state polls, expected to be held in mid-August, and the US Federal Reserve’s (Fed) continued interest rate hike.

“We advocate accumulating during this weakness as toppish US federal fund rate (FFR)-Malaysia’s overnight policy rate (OPR) spreads are in sight – we are betting by September,” it said.

“This could mark a turning point for the ringgit and local bourse heading into the fourth quarter of 2023. There are also reasonable avenues for liquidity inflows given the absence of Employee Provident Fund (EPF) withdrawals, stamp duty cut to rejuvenate retailers, and record low foreign shareholding,” it explained.

HLIB Research’s year-end FBM KLCI target stood at 1,530, pegged at 14.8 times price-earnings for mid-2024 earnings per share.

“We reckon that battered valuations – with the bellwether index’s price-to-book at minus two standard deviation – offers some solace for bottom nibbling,” it said.

HLIB Research said it expected Bank Negara to keep the OPR unchanged at 3% for the rest of this year, noting that the rate was now already back at pre-pandemic levels and real interest rates were expected to turn positive in the second half of 2023 as inflation continues to ease.

It said with toppish FFR-OPR spreads in sight, there could be a turning point for the ringgit, which had depreciated significantly in recent months.

“We expect the depreciation of the ringgit to continue in the third quarter before recovering in the fourth quarter to end the year at RM4.40 per US dollar (2023 average: RM4.56 per US dollar),” HLIB Research said.

“The latter scenario augurs well for the local stock market as the FBM KLCI has reacted positively during times of ringgit strength, vice versa.

“In addition, given the negative correlation (down 55%) between FFR-OPR spread and FBM KLCI, peaking of the former should help arrest further market weakness,” it explained.

Meanwhile, HLIB Research said it expected no change in governance for the upcoming six state elections.

“Once the polls are done and dusted, this provides the unity government with a decent runway as the next election will not be due until the fourth quarter of 2025 (Sabah) – giving it sufficient time to push through the necessary (but perhaps unpopular) economic reforms,” it said.

It added that liquidity inflows to the local bourse would likely improve towards the final quarter of the year, as foreigners had been “underweight” on Malaysia for almost three years, with their shareholding at a record low 20% as of May 2023.

This would further be supported by inflows from local institutional investors, driven by the absence of special EPF withdrawals this year, alongside higher domestic allocation for new contributions; as well as the anticipation of higher retail participation, thanks to the lower stamp duty.