Analysts are betting the local benchmark has a low bar to cross and is ripe for a lift following the state elections on Aug 12, on the assumption the unity government maintains control of leading three of the six states involved in the process.
PETALING JAYA: The potential peak in the rate cycles of central banks and the easing of the political risk premium on the local equity market could be the catalyst for a narrowing of year-to-date losses in the FBM KLCI in the second half of the year (2H23).
Analysts are betting the local benchmark, which has come off six-month lows but still down some 9% for the year in US dollar terms, has a low bar to cross and is ripe for a lift following the state elections on Aug 12, on the assumption the unity government maintains control of leading three of the six states involved in the process.
“The biggest drivers for the local market are the state elections, EPF investments and tech recovery. A status quo of the election results will be viewed as good news by investors and more EPF investments domestically will help sentiment,” Peter Lim Tze Cheng, founder and chief research officer at Trident Analytics Sdn Bhd, told StarBiz.
He also expects a recovery in the global tech sector in 2H23 will spill over to the local tech sector through the supply chain links after some 18 months of a slowdown.
A more positive election outcome would lift investor sentiment, much like what transpired last Friday after Prime Minister Datuk Seri Anwar Ibrahim spoke with the world’s richest man, Elon Musk of Tesla Inc, when the local benchmark broke past the 1,400 psychological level to close 16 points higher at 1,412 points, with some 650 stocks ending higher as the ringgit strengthened.
There are also fundamental factors that could drive the change in perception about the local market.
“We advocate a progressively risk-on strategy in 2H23, capitalising on themes such as trade diversion from the US-China trade war, a cyclical recovery of the global semiconductor sector in the fourth quarter (4Q23), plantations gaining from the unfolding of El Nino, blockchain development in Malaysia (3Q23 to 4Q23), and fuller recovery of intra-Asian travel when China substantially restores its airline capacity (4Q23),” said Vincent Khoo of UOB Kay Hian Research.
A risk-on strategy is still valid should the state election results not fully meet the research outfit’s expectations as larger catalytic factors include the possible peaking of the US interest rate cycle and more stimulus measures being announced to support the weak Chinese economy.
Global markets gained last week after the US consumer price index data showed inflation had eased further last month, leading investors to forecast the end of the Federal Reserve (Fed) tightening cycle soon, likely by this month, and underpinned by expectations the United States economy will avoid a recession this year.
A China recovery could be far more slower as Beijing is focused on achieving quality growth, leading Nixon Wong, chief investment officer at Tradeview Capital Sdn Bhd, to anticipate any stimulus measures to be gradual rather than on a large scale, in line with the pace of economic recovery.
“Despite this approach, we believe there could still be a positive spillover effect on the Malaysian economy from China’s projected recovery. Specifically, we expect to see a boost in both the tourism and consumer discretionary segments, and to some extent, the oil and gas sector may also benefit from increased demand for oil as manufacturing and economic activities resume,” he said.
The immediate hurdle for markets to overcome will come from the upcoming earnings season. While the bulk of local corporates will file their numbers next month, many global names like Tesla, Taiwan Semiconductor Manufacturing Co Ltd and major American banks will announce their results over the next few days and thus determine the mood of the market.
“Second half earnings are unlikely to see significant growth, weighed down mainly by higher operating costs and ringgit weakness. Nevertheless, valuations are likely to recover post elections as investors may assign lower risk premium in the absence of political risk in the Malaysian market in general,” said Wong.
The quarterly results could witness better earnings growth from domestically focused corporates, benefiting from stable domestic consumption and a healthy labour market while exporters remain largely dependent on macro conditions, he said.
While analysts are bullish on tech, CGS-CIMB Research warned the cyclical downturn in the sector could prove to be worse than currently expected despite the sector offering exposure to structural global themes.
“While we acknowledge the thematic upside in the technology sector, we are also wary of downside risks, especially for stocks where high growth expectations are still built into estimates and share prices have not really corrected since the gains in 2018-2021,” the research house stated in a strategy note on Malaysia.
Moreover, it suspects there could be further downgrades over the next one to two results seasons, taking into account the fact that the cumulative profits of its tracked tech companies in 1Q23 make up just 11% of their latest full-year targets.
While earnings may drive valuations, the prospects of a Fed pivot could lead to a positive inflection in risk sentiment especially towards emerging market assets given anticipated sustained weakening in the US dollar, and improve Bursa Malaysia’s prospects in the process.
“We are cautiously optimistic on improved market traction over 2H23 despite still-soft earnings expectations. Besides peaking interest rates, the upcoming state elections and Budget 2024 in October could surprise positively re-political and policy follow-through versus current depressed expectations.
“Our foreign exchange team also expects a positive ringgit reversal into 4Q23 as China’s growth outlook stabilises and the Fed’s narrative turns more dovish,” Maybank Investment Bank Research said in a recent report.
That said, a chartist with a local brokerage said the benchmark index is set to consolidate in the near term leading into the election period with likely trade range bound between the 1390 to 1420 point range, awaiting leads to breakout of the range.
UOB Kay Hian Research has a 2023 year-end FBM KLCI target of 1,520 points based on 15.2 times 2023 earnings. It forecast the FBM KLCI’s 2023 earnings growth would be pedestrian at below 3% after excluding 2022’s one-off prosperity tax.
